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Big Banks Start Betting On Jumbo Mortgages

14 June 2013 in Trading Ideas

As if the recent rise in home prices wasn’t enough evidence of a revival in the housing market, the increase of investors’ willingness to snap up mortgage-backed securities goes a long way to make the case.

CNBC.com recently reported that as home prices rise, so, too, is the demand for jumbo mortgages, loans that are above traditional conforming loan limits.1 During the financial crisis, banks were making these loans, but continuing to hold them on their books. That state of affairs wasn’t optimal, since being able to sell off jumbo mortgages lessens the risk for lenders.

But now that’s starting to change. According to CNBC.com, the number of jumbo loans originated in the first quarter of this year rose 15% from a year earlier. But the number of those loans that were securitized and sold by lenders jumped 400%. In the first quarter alone, $4 billion worth of jumbo loans were sold to investors – that’s more than the $3.5 billion of jumbos originated in all of 2013.

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Still, the market is still relatively tiny. As the Wall Street Journal reported, even a projected $16 billion in securitized loans in 2013 would still represent just 7% of the expected overall $220 billion volume for jumbo loans.2

Indeed, it was only in 2010 that Redwood Trust was the first player to re-enter the secondary market. In the wake of their success came other players, including Credit Suisse and JPMorgan Chase, the latter of whom announced last month that it would sell bonds backed by $443 million of jumbo mortgages.3

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JPMorgan also happens to be a top component (14.3% by weight) of the portfolio of stocks in the Too Big To Fail motif, which has posted gains this year and in the past month, as large banks and other financial services companies continue to exhibit stronger operational performances.

The motif is up 18.0% so far in 2013, and has increased 48.5% in the past 12 months.

With several banks having now re-entered a market (cautiously, this time) that once signified their downfall, optimism for increasing bank revenue appears to be trending just as high.

1Diana Olick, “As Investors Return to Jumbo Mortgages, Big Banks Sell,” CNBC.com, June 10, 2013, http://www.cnbc.com/id/100802833.

2Anya Martin, “Investors Show Renewed Interest in Mortgage-Backed Securities,” WSJ.com, June 6, 2013.

3Jody Shenn, “JPMorgan to Sell Bonds Backed by $443 Million of Mortgages,” Bloomberg.com, May 23, 2013, http://www.bloomberg.com/news/2013-05-23/jpmorgan-to-sell-bonds-backed-by-443-million-of-mortgages-1-.html, (accessed June 11, 2013).