OFHEO Working Papers are preliminary products circulated to stimulate  discussion and critical comment
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OFHEO Working Papers are preliminary products circulated to stimulate discussion and critical comment

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OFHEO WORKING PAPERS WORKING PAPER 07 - 1 Securitized Jumbo Mortgages: 1986 - 2005 by Everson W. Hull Office of Federal Housing Enterprise Oversight 1700 G Street N.W. Washington, DC 20552 (202) 414-6930 ehull@ofheo.gov June 2007 OFHEO Working Papers are preliminary products circulated to stimulate discussion and critical comment. The analysis and conclusions are those of the authors and do not imply concurrence by other staff at the Office of Federal Housing Enterprise Oversight or its Director. Single copies of the paper will be provided upon request. Comments on this paper should be directed to the author (contact info above). References to OFHEO Working Papers (other than acknowledgment by a writer that he or she has had access to such working paper) should be cleared with the author to protect the tentative character of these papers. Abstract Securitized Jumbo Mortgages: 1986 - 2005 This paper provides a historical review of the characteristics of jumbo mortgages financed through securitization. The research uses loan-level data on a large proportion of all jumbo mortgages originated from 1986 through 2005 and later securitized. That sample permits detailed analysis of variations over time in the purchase and refinance shares of jumbo loans that were securitized, the types of loan products preferred by borrowers who took out those jumbo loans, the loan-to-value (LTV) ratios of the ...

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OFHEO WORKING PAPERS




WORKING PAPER 07 - 1



Securitized Jumbo Mortgages:
1986 - 2005


by


Everson W. Hull
Office of Federal Housing Enterprise Oversight
1700 G Street N.W.
Washington, DC 20552
(202) 414-6930
ehull@ofheo.gov



June 2007



OFHEO Working Papers are preliminary products circulated to stimulate discussion and
critical comment. The analysis and conclusions are those of the authors and do not imply
concurrence by other staff at the Office of Federal Housing Enterprise Oversight or its
Director. Single copies of the paper will be provided upon request. Comments on this
paper should be directed to the author (contact info above). References to OFHEO
Working Papers (other than acknowledgment by a writer that he or she has had access to
such working paper) should be cleared with the author to protect the tentative character of
these papers.
Abstract

Securitized Jumbo Mortgages:
1986 - 2005


This paper provides a historical review of the characteristics of jumbo mortgages
financed through securitization. The research uses loan-level data on a large proportion
of all jumbo mortgages originated from 1986 through 2005 and later securitized. That
sample permits detailed analysis of variations over time in the purchase and refinance
shares of jumbo loans that were securitized, the types of loan products preferred by
borrowers who took out those jumbo loans, the loan-to-value (LTV) ratios of the
mortgages, and the credit scores of the borrowers.

The analysis finds that the fixed-rate share of jumbo mortgages that were securitized is
highly sensitive to changes in the spread between the yields on fixed- and adjustable-rate
loans. Year-to-year fluctuations in the average sale price of houses financed with jumbo
mortgages that were securitized are more pronounced than variations in the sale prices of
all new and existing homes in the U.S. During the protracted episode of extraordinarily
low, single-digit mortgage rates of 2001-2004, hybrid and interest-only (IO) adjustable-
rate mortgages comprised a rapidly growing share of jumbo loans that were securitized.
During that episode of declining interest rates, borrowers preferred making larger down
payments on jumbo mortgages that were securitized that had both fixed and adjustable
rates and that were used both to purchase homes and to refinance existing loans.

Fifty-eight percent of borrowers who took out jumbo mortgages originated since 1996
and later securitized had FICO scores at origination of 700 to 800. Borrowers with FICO
scores below 650 accounted for 18 percent of all those securitized jumbo loans.
Borrowers with FICO scores greater than 800 consistently took out loans with low LTV
ratios. There is a striking degree of consistent risk-based pricing by LTV ratio of jumbo
mortgages that are securitized. When those loans are grouped based on borrower credit
scores, interest rates are generally higher as LTV ratios increase. The yields on jumbo ritized are far less sensitive to borrower credit scores.












ii
Securitized Jumbo Mortgages: 1986 – 2005


Page
I. INTRODUCTION 1
II. THE EVOLUTION OF THE MARKET FOR JUMBO MORTGAGES 2
Changes in the Conforming Loan Limits
Originations of Jumbo Mortgages, 1993 – 2005 4
Securitization of Jumbo Mortgages, 1993-2005 7
Geographic Distribution of Jumbo Loans that Were Securitized 10
III. CHARACTERISTICS OF SECURITIZED JUMBO MORTGAGES 11
Product Type 11
Loan Purpose 15
Loan-to-Value (LTV) Ratios 19
Borrower Credit Scores 22
Risk-Based Pricing of Securitized Jumbo Mortgages 25
IV. CONCLUSION 30
REFERENCES 32
APPENDIX A: The Data 33
APPENDIX B: Comparison of LoanPerformance.com and MIRS Data Samples 36






LIST OF TABLES Page
Table 1: Jumbo Share of Total Mortgage Originations 6
Table 2: Growth Rates for Jumbo Mortgages and all Conventional Single-Famil 7
Mortgages and Changes in Interest Rates
Table 3: Jumbo Mortgages Originated in 2005 and Securitized, by State 10
Table 4: Originations of Jumbo Mortgages that were Securitized, 1986 to 2005 12
by Product Type: Percent Share of Total Loans Versus Interest Rates
Table 5: Risk-Based Pricing of Securitized Jumbo Fixed Rate Mortgages, 27
By Fico and LTV Categories, Year 2005
Table A-1: Summary Descriptive Statistics for Selected Variables 35

iii

LIST OF CHARTS Page
Chart 1: Conforming Limits, Originations Amounts of Jumbo Mortgages, 3
and Sale Prices, 1986 to 2005
Chart 2: Annual rates of Change in Sale Prices 4
Chart 3: Originations of Jumbo and Single-Family Mortgages 5
Chart 4: Annual Growth Rates of Single-Family Mortgage Originations 9
Chart 5: Shares of Securitized Jumbo and All Conventional Originations, 13
by Major Product Type
Chart 6: Securitized Jumbo Mortgages, by Loan Purpose, 1986 to 2005 16
Chart 7: Refinance Share of Conventional Single-Family Mortgages, 18
1998 to 2005
Chart 8: Refinance Share of Securitized Jumbo Mortgages Versus 18
Commitment Rates on Non-jumbo 30-Year FRMs, 1986 to 2005
Chart 9: Share of Securitized Jumbo Mortgages, by Loan-to-Value Ratio, 20
1986 to 2005
Chart 10: Average Loan-to-value (LTV) Ratios for Securitized Jumbo 21
Mortgages, by Purpose of Loan, 1986 to 2005
Chart 11: Sbo Loans, by FICO Score, 23
Chart 12: Average Loan-to-value (LTV) Ratios of Securitized Purchase 24
Jumbo Mortgages by FICO Score Category
Chart 13: Average Loan-to-value (LTV) Ratios of Securitized No-Cash-Out 25
Refinance Jumbo Mortgages by FICO Score Category
Chart 14: The Pricing of Securitized Jumbo Fixed-Rate Purchase Mortgages 26
Chart 15: The Pricing of Securitized No-Cash-Out Refinance Fixed Rate 26
Jumbo Mortgages
Chart 16: The Pricing of Fixed Rate Securitized Jumbo Purchase Mortgages, 28
by FICO and LTV in 2005
Chart 17: The Pricing of Fixed Rate Securitized Jumbo Cash-out Refinance 29
Mortgages, by FICO and LTV in 2005
Chart B-1: Average Loan Amounts For Jumbo Purchase Mortgages, 1986 to 37
2005
Chart B-2: Fixed Rate Shares of Jumbo Purchase Mortgages, 1986 to 2005 37
Chart B-3: Average LTV Ratios of Fixed Rate Jumbo Purchase Mortgages, 39
1986 to 2005
Chart B-4: Share of Jumbo Mortgage, With LTV Ratios Over 90 percent, 39
1986 to 2005

ivSecuritized Jumbo Mortgages: 1986 - 2005



I. INTRODUCTION

This paper provides a historical review of the characteristics of jumbo mortgages financed
through securitization. A jumbo mortgage is a 1-4 (single-) family residential loan whose
principal balance at origination exceeds the conforming loan limit for that year. Fannie
Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that support the
secondary mortgage market, are restricted to buying single-family loans that have balances
less than that limit, which is adjusted annually based on changes in U.S. housing prices. In
recent years jumbo mortgages have accounted for one-fifth to one-quarter of all
originations of conventional loans—those that are neither insured nor guaranteed by the
federal government—and about one-third of jumbo originations have been securitized. The
market for mortgage-backed securities (MBS) collateralized by jumbo loans is the fourth
largest segment of the U.S. secondary mortgage market, after the markets for MBS
guaranteed by Fannie Mae, Freddie Mac, and the Government National Mortgage
Association (Ginnie Mae).

Most previous research on the jumbo mortgage market has relied on the Monthly
Interest Rate Survey (MIRS) conducted by the Federal Housing Finance Board (FHFB),
which collects data on conventional first mortgages used to purchase homes
(McKenzie 2002; Passmore, Sherlund, and Burgess 2005). The MIRS has three major
shortcomings: the survey does not collect information on refinance mortgages, lacks data
on the credit history of borrowers, and is based on a small sample of loans. This paper uses
a sample of over 2.7 million jumbo loans developed from a June 2006 dataset provided by
LoanPerformance.com, a private firm that collects information from servicers about the
collateral backing MBS. That dataset provides loan-level information on a large proportion
of all jumbo mortgages securitized since 1970. The sample used in the paper permits
detailed analysis of variations over time in the purchase and refinance shares of jumbo
loans that have been securitized, the types of loan products preferred by jumbo borrowers,
the loan-to-value (LTV) ratios of the mortgages, and the credit scores of the borrowers.

*The author thanks Laura Goren for her painstaking work in updating an earlier draft with the most recent 2005 data. Future research will use the sample to examine the spreads between the yields of jumbo
and non-jumbo mortgages.

The remainder of the paper is organized as follows. Section II summarizes the
evolution of the market for jumbo mortgages, focusing particularly on origination and
securitization activity since 1992. Section III discusses the characteristics of the
securitized jumbo mortgages in the sample used in the paper. Section IV concludes the
paper and indicates avenues for future research. Appendix A summarizes how the sample
used in the paper was created and provides descriptive statistics on key variables.
Appendix B compares the sample to data reported by the FHFB’s MIRS.


II. THE EVOLUTION OF THE MARKET FOR JUMBO MORTGAGES

The distinction between jumbo and non-jumbo conventional mortgages dates to 1970,
when the conforming loan limit was established. The volume of jumbo mortgage
originations was relatively low in the 1970s and 1980s but grew rapidly in the 1990s and
reached $570 billion in 2005. The primary drivers of the growth of jumbo originations
have been changes in the conforming limit and the expansion of the conventional mortgage
market as a whole. Securitization of jumbo loans began in the early 1980s and did not
exceed $70 billion a year until 1992, but expanded rapidly in the late 1990s, reaching $237
billion in 2003 before declining to $205 billion in 2005. This section summarizes growth
in the origination and securitization of jumbo mortgages, focusing particularly on activity
since 1992. The section also provides recent information on the geographic distribution of
jumbo loans that have been securitized.

Changes in the Conforming Loan Limit

The Emergency Home Finance Act of 1970, which authorized the creation of Freddie Mac,
established what came to be called the conforming loan limit. The limit has ranged from
$33,000 in the early 1970s to $417,000 in 2006. Since 1980, the limit has been adjusted
- 2 -upwards each year to reflect the percentage change (in the year ending the previous
October) in the national average purchase price for all conventionally financed homes, as
reported by the FHFB’s MIRS. The limit is 50 percent higher in Alaska, Hawaii, Guam,
1and the U.S.Virgin Islands than in the continental U.S.

The average jumbo mortgage has a principal balance at origination that is
considerably greater than the conforming loan limit. For example, the sample used in this
paper indicates that the annual average loan size of jumbo mortgages originated in 2005
2was $552,684. That average exceeded that year’s conforming loan limit of $359,650 by
53.7 percent. That percentage differential was lower than the 58.4 percent average
differential over the 25-year interval ending in 2005 (Chart 1).

CHART 1
CONFORMING LIMITS, ORIGINATION AMOUNTS OF JUMBO MORTGAGES AND
SALE PRICES, 1970 TO 2005
Average Sale Price of Homes Financed with Securitized Jumbos
Average Origination Amount of Securitized Jumbos
Conforming Limit
Average U.S. House Sale Prices
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Source: OFHEO: Based on data from Loan Performance.com and various quarterly issues of U.S. Housing Market Conditions ,
Office of Policy Development and Research, U.S. Department of Housing and Urban Development, May, 2006.


1 12 USC 302 (b)(2) and 305(a)(2)
2 The median value was $486,615.
- 3 -
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
9821
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005Chart 2 compares the annual rates of change from 1983 through 2005 in the average
sale prices of all new and existing homes and of homes financed with jumbo mortgages
that were securitized. Year-to-year fluctuations in the annual average sale price of houses
financed with those jumbo loans were more pronounced than variations in the sale prices of
new and existing homes. That finding is consistent with research by Ambrose, Buttimer,
and Thibodeau (2001), which found that the prices of jumbo-financed homes are more
volatile than the prices of less expensive homes.

CHART 2
ANNUAL RATES OF CHANGE IN SALE PRICES
(Percent Change)
Average Sale Price of Homes Financed With Securitized Jumbo Mortgages
Average All New House Sale Prices (Census)
Average All Existing House Sale Prices (NAR)
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
Source: OFHEO: Based on data from Loan Performance.com and various quarterly issues of U.S. Housing Market Conditions ,
Office of Policy Development and Research, U.S. Department of Housing and Urban Development, May, 2006.


Originations of Jumbo Mortgages, 1993 - 2005

The volume of jumbo mortgage originations more than tripled between 1993 and 2005.
With the exceptions of 1995, 1999, 2000 and 2004, the jumbo market expanded in each
year of that period (Chart 3). The growth of the jumbo market was most pronounced after

- 4 -
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1 599
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005CHART 3

ORIGINATIONS OF JUMBO AND SINGLE-FAMILY MORTGAGES
All Jumbos All Conventional Originations Total Mortgage Originations
3,835
3,600
3,120
3,100
2,810
2,680
2,600
2,0582,100
1,600 1,450
1,310
1,0481,0201,100
859
785773
639 625
570532 548600
400358 306
252204 198181162 146
100
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: The 2006 Mortgage Statistical Annual, Vol. 1, Inside Mortgage Finance Publications Inc.


2000. Beginning in November of that year, a protracted episode of declining interest rates
helped to produce record increases in housing activity. Conventional market originations
almost quadrupled from 2000 to 2003, reaching a record-high of $3.6 trillion in the last
year. Over that interval, the volume of jumbo mortgage originations more than doubled,
rising to $625 billion in 2003. The relatively slower pace of growth of jumbo originations
reduced the jumbo share of all originations. That share declined from 24 percent in 2000 to
16.3 percent in 2003 (Table 1). In 2004, jumbo originations slipped by 12.3 percent to
$548 billion. That decline was lower than the drop in all mortgage market originations, so
that the jumbo share of the market increased to 19.5 percent. In 2005, jumbo originations
rose by 4 percent to $570 billion, but the jumbo share of the market slipped to 18.3 percent.

Table 2 shows that the strong inverse relationship between changes in interest rates
and changes in the demand for conventional loans were also very much in evidence in the
jumbo market. The sharp increases in mortgage rates, as reflected in the commitment rate
on 30-year fixed rate mortgages (FRMs) reported by Freddie Mac, that occurred during

- 5 -
Billions of DollarsTABLE 1

JUMBO SHARE OF TOTAL MORTGAGE ORIGINATIONS

All Jumbo Total Mortgage Jumbo Share of All
Originations Originations Originations
Year (Billions of Dollars) (Billions of Dollars) (%)
1993 204 1,020 20.0
1994 162 773 21.0
1995 146 639 22.9
1996 181 785 23.0
1997 198 859 23.0
1998 358 1,450 24.7
1999 306 1,310 23.4
2000 252 1,048 24.0
2001 400 2,058 19.4
2002 532 2,680 19.9
2003 625 3,835 16.3
2004 548 2,810 19.5
2005 570 3,120 18.3
Source: The 2006 Mortgage Market Statistical Annual, Vol. II.,
Inside Mortgage Finance Publications, Inc., 2006


1994, 1999 and 2000 were associated with significant reductions in the volume of both jumbo
and conventional mortgage originations. Between 2000 and 2005, the annual average Freddie
Mac commitment rate declined by 227 basis points to 5.99 percent. That rate reduction was
associated with a surge in demand for all conventional mortgages, including jumbo loans.














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