Wall Street Journal: Jumbo Loan - Uh Oh

Submitted By Trader Mark
May I introduce you to part of your new portfolio - Jum bo Loans? Yes you, dear taxpayer - you are part owner via the Federal Reserve "Everyone gets a portfolio of Mortgage Backed Securities" gift. This way every American who pays a penny of taxes gets to be part of the "free market" and "ownership society".

The new relief plan would apply to the billions of dollars of mortgage assets the Fed is holding on its books because of last year's bailouts of Bear Stearns and insurer American International Group. Borrowers have no way of knowing whether their mortgages are held by the Fed, because their loan payments are collected by other companies, known as loan servicers.
Under the Fed's new foreclosure prevention effort, homeowners may get a reduced interest rate, longer loan term or a lower total mortgage amount.
In general, a borrower must be at least 60 days delinquent to qualify for help, although the Fed has leeway to make some exceptions.

So here's the moral hazard we introduce - go late by 60 days on your mortgage and if you are one of the lucky "chosen"... and the Fed already owns your mortgage - ding, ding: you win! What do you win? Your neighbor's tax dollars. It's Russian Roulette but in reverse. The people who pay their bills get the bullet to the head. Even though we already have evidence that people who get modified mortgages ALREADY are showing default rates in excess of 50% within the first 6 months - that's ok. Put our tax dollars to work... try try again! [Dec 8: More than Half of Homeowners with Modified Loans are Back in Trouble]

Fannie and Freddie were actually excluded from backing jumbos until the bright minds in D.C. decided in first half 2008 (just months before FanFredron imploded) to "increase the limits" (off top of my head from somewhere in the $430K range to $700Ks) Plus plenty of these are stuffed in Bear Stearns, AIGs portfolios (which we already are proud owners of) .... plus all the new mortgage backed securities that will soon be coming our way through Bad Bank/Good Bank.

So let's see what we're going to add to our portfolio shall we? As you read this remember these are the "prime" borrowers (cough) - not the Alt As, option only or those long forgotten subprime. Just repeat to yourself - as long as we are good boys and girls, and hold these securities for a long time, we'll all win in the end. On the Fed balance sheet only good things happen. Because the free market is not correctly pricing this junk (err, quality merchandise), and only 12 men in a room in Washington D.C. with a model know how to price it. Ah, happy endings - up there with unicorns, fairies, and Kool Aid.

Long and strong - we're in this together folks! (except you poor foreign readers - you do not get any piece of this action!)

Rising defaults by affluent homeowners are raising the specter of another cloud over banks and investors, which could get stuck with thousands of expensive homes. About 6.9% of prime "jumbo" loans were at least 90 days delinquent in December, according to LPS Applied Analytics, a mortgage-data research firm. The rate was up sharply from 2.6% a year earlier. (hmm, I wonder what happens a year from now when unemployment rate is far higher and savings depleted?)
Jumbo mortgages average about $750,000 and can run as high as $5 million or more. More borrowers with such loans are being hit by layoffs that are spreading through practically every sector and pay level of the U.S. economy.
Defaults on jumbo mortgages tend to result in especially steep losses for lenders, because pricier homes are tough to sell in the current market. (just hold out for 2nd half 2009 when the recovery happens - should be easy to sell then)
Last month, the mounting defaults prompted Moody's Investors Service to downgrade hundreds of tranches of prime jumbo loans sold to investors as securities. Moody's has downgraded more than 75% of all prime jumbo loans originated in 2006 and 2007 that carried the top rating of triple-A. (oh, Moody's - where do I even start with these ratings agencies...)

From 2002 to 2006, banks originated an average of $557 billion a year in jumbo loans, according to Inside Mortgage Finance, a trade publication.
The top two originators, Chase Home Finance and Washington Mutual, both part of J.P. Morgan Chase & Co., made more than 25% of all jumbo loans, while Bank of America Corp. and Wells Fargo & Co. each accounted for 11% of the jumbo market.
Last July, J.P. Morgan disclosed that it had $34.4 billion in jumbo mortgages. "We were wrong," Mr. Dimon says. "We obviously wish we hadn't done it." (no problem Jaime - my unborn grandchild will take care of this one. Let's call it even)
Earlier this month, Wells Fargo stopped buying jumbo mortgages originated by mortgage brokers. (sounds like a good business practice)

Hmm makes sense now - JPMorgan was so weak going into this week... but that was in a different era. An era where the only bad banks had funny names like Citigroup or Lehman. Now we have the United States of Bad Bank.... where all our problems will go to disappear.

Other big jumbo-mortgage lenders still are advertising their loans but have "intentionally priced themselves out of the market" by charging high rates, says Peter Boger, operating chief at Ridgewood Savings Bank.

So now that old banks are reluctant to make bad loans and are going back to strict lending standards that they should of never wavered from.... what sucker would still be making these jumbo loans in a degrading economy where more and more borrowers will not be able to pay said lender back?

Jumbo mortgages aren't a big part of J.P. Morgan's loan business anymore; government-backed loans now account for more than 90% of originations. "We continue to make [jumbos] as an accommodation to customers," said spokesman Thomas Kelly. "It's not a big part of what we do."

Ah yes. When you look around the room and cannot figure out who the sucker is... well, then the sucker is you.

Nearly 25% of prime jumbo mortgages exceeded the value of the homes they backed in September, according to Credit Suisse. That figure would increase to 42% given home-price declines of 15% over the next two years.

The circularity of all this is something a fiction writer could not make up. Talk about lender of last resort.

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