Fannie Mae and Freddie Mac loans that are more than $417,000 fall into a special category that can’t be traded in the main part of the government-backed bond market, leaving them with higher rates. Redwood’s Hughes said at the April 24 hearing of the House Financial Services Committee that Wells Fargo two days earlier had been offering those “agency jumbo” loans at 3.63 percent, compared with its quotes for true jumbo loans of 3.88 percent.
Higher Yields
Hughes said “we are not that far off” from closing the gap, though the wider spreads on the AAA securities Redwood sold yesterday may make that harder.
Bond investors’ demands for higher yields may already be impacting borrowers, with jumbo loans costing 88 basis points more than smaller mortgages yesterday, up from 42 basis points on March 8, according to data from LoanSifter Inc., a mortgage technology firm whose information has been cited in Fed papers. Still, that’s down from 141 basis points in September.
The non-agency market this year has also wrestled with lenders and bond issuers including JPMorgan and Credit Suisse seeking to build deals with more protections for themselves against forced repurchases of misrepresented debt.
Investor Protections
Moody’s Investors Service said in a March report that the relief granted in JPMorgan’s first deal in the market since 2008 was so extensive that it meant the top ratings competitors granted weren’t appropriate. Rating firms have said Redwood’s deals offered strong investor protections, though larger banks may be better able to survive repurchase demands.
“There has been so much litigation that it’s going to be a painful process to get the wording in place that all sides can live with,” said Michael Canter, head of securitized assets at AllianceBernstein Holding LP, which manages $443 billion.
While Canter said he would accept greater limits on repurchases when a misrepresentation isn’t tied to the reason a borrower defaults, the “language needs to be carefully worded.” He would be concerned if bond contracts didn’t call for all defaulted loans to be reviewed for underwriting mistakes, an investor-friendly shift from the protocols before the crisis. The Redwood deals include that provision.
“I want to see a thriving mortgage market away from the government,” he said. “For that to happen we need originators to be comfortable originating and securitizing in the non-agency market, and investors need to be comfortable, too.”