By Jody Shenn
Sept. 18 (Bloomberg) -- Securities backed by prime U.S.jumbo mortgages may be riskier than investors think becausealmost half of the underlying loans are from California, wherehome prices may again collapse, according to Barclays PLC.
California accounts for 45 percent of jumbo mortgages insecurities sold last year, up from 35 percent in 1989, Barclaysmortgage-bond analysts wrote in a report yesterday. Following ahousing boom, home prices in California declined by 12.5 percentbetween 1991 and 1995. Losses after foreclosures on jumbo loanssecuritized in 1989 rose to 3 percent, which would be enough tocause many current investment-grade bonds to default.
``The current housing environment in California appearssimilar to the 1990s,'' wrote the New York-based analysts led byAjay Rajadhyaksha. ``Many investors believe that jumbo credit issound. We think that this sense of security is misplaced.''
As demand wanes for non-guaranteed mortgages bonds amidtightened bond-financing terms and the highest U.S. foreclosurerate on record, jumbos have fared better than their counterparts.Earlier this month, investors offered to pay 75 cents per $100more for fixed-rated prime jumbo securities than for similar non-jumbo Alt-A debt, according to Deutsche Bank AG.
About $500 billion in prime jumbo-loan bonds areoutstanding, according to a March report from Zurich-based CreditSuisse Group. Prime mortgages are considered the safest, and meetthe standards of Washington-based Fannie Mae and McLean,Virginia-based Freddie Mac. Jumbo mortgages are those larger thanwhat the government-chartered companies may buy, or above$417,000 for the past two years. Alt-A mortgages fall short ofthe companies' standard guidelines.
Housing Recession
The housing recession in the early 1990s in California wasdriven by over-appreciation in the preceding years and job lossesin the defense industry, the Barclays analysts wrote. Today, arapid rise in prices may combine with tightening lending terms tocause another crash.
For instance, Detroit-based GMAC LLC's GMAC ResidentialFunding Corp. and IndyMac Bancorp Inc. of Pasadena, California,no longer offer jumbo mortgages with down payments smaller than 5percent amid lower bond investor demand, and the lenders alsohave tightened income-documentation requirements, they wrote.
The median resale price of a single-family home inCalifornia in July 2007 was $586,030, compared with $221,500 inDecember 1999, according to the California Association ofRealtors. Though ``credit drying up'' will depress the state'shousing market in the short term, lending may loosen and thestate's economy remain strong, Leslie Appleton-Young, the group'schief economist, said in a statement last month.
Documented Income
The effects of a California slump on jumbo securities willbe worsened by the loans also having ``become riskier,'' theBarclays analysts wrote. More than half of fixed-rate Californiajumbo mortgages packaged into bonds in 2005 and 2006 didn'trequire borrowers to fully document their incomes or assets,compared with 19 percent in 1989, they said.
The share of prime jumbo mortgages in bonds at least 90 dayslate, in foreclosure or already turned into seized property roseto 0.38 percent in June from 0.23 percent a year earlier,according to Arlington, Virginia-based securities firm FriedmanBillings Ramsey Group Inc. That compares with a recent high of 1percent in 2002, and to record default rates of 3 percent and13.4 percent for Alt-A and subprime loans, respectively.
Investors in highly rated securities backed by pools ofjumbo mortgages are protected against lower levels of loanlosses than investors in bonds backed by riskier loans. For BBBsecurities, the second-lowest investment grade, the protectionmay be about 1 percent or less, the Barclays analysts wrote. Theprotection can come in the form of having lower-rated securitieshurt by foreclosure losses first, among other things.
To contact the reporter on this story:Jody Shenn in New York at jshenn@bloomberg.net .
Last Updated: September 18, 2007 11:01 EDT
