Monday, October 8, 2007

Jumbo Mortgage Market Improves.

Fannie Mae put out a research piece highlighting the spread in the jumbo market vs the conforming "government guaranteed" paper. As you can see that the spread widened to about 1% and now is drifting down. The reason for the improvement is the market is repricing risk and we have seen improved jumbo mortgage rates especially for money good credits. These are the lower loan to value,higher FICO, and solid income loans. We continue to see higher rates for high loan to value scenarios. Most lenders/investors aren't doing 2nd's above 80%. WAMU and Indymac are out of this market. The market currently believes we will see a substantial decline in prices in the bubble areas so they aren't lending for risky loans. Scenarios above 80% on traditional jumbo lending require mortgage insurance from GE, AIG, etc. The monthly cost varies based on risk but can be $200-800 a month depending on loan balance and whether they agree to pledge their first born. All of the subprime jumbo mortgages are without mortgage insurance that's why they are trading at FIRE SALE prices. I believe we will see a clear distinction between the various risk levels. As in beef, a filet mignon is not a chuck roast. The market of 02-06 was so hungry for loans of any kind they couldn't tell the difference.

Image from Monty Python "The Meaning of Life"