Not all jumbo issuers are alike

Mortgage Banking, Dec, 1998 by David Teicher, Mark H. Adelson, Linda A. Stesney

On the surface, Countrywide's pools seem roughly similar to those of other major MBS issuers. However, it is fair to say that Countrywide's pools sometimes have a higher-than-average concentration of loans secured by properties in California; that the proportion of loans secured by owner-occupied homes is slightly higher than for other issuers' pools; and that the proportion of cash-out refinancings is slightly higher than average. But these deviations from the norm are slight and do not have an impact on Country wide's baseline levels. In sum, the superior performance of Countrywide's pools is not readily attributable to measurable characteristics of its loans.

In many of Countrywide's recent deals, the company mixes Alternative-A loans with its regular jumbo mortgage production. (Alt-A loans are distinct from regular jumbo loans. Alt-A loans are generally underwritten to less restrictive guidelines than ordinary jumbo loans and may allow higher loan balances, less documentation, investor-property-secured loans and loans to foreign nationals.) When that happens, the actual Aaa credit-enhancement levels for the deal can be much higher than the baseline level for jumbo loans. The need for more credit enhancement reflects the riskier nature of Alternative-A loans as compared to regular jumbo loans.

Countrywide's consistently excellent pool performance is a natural outgrowth of its consistently excellent origination and underwriting practices. This explains why Countrywide has lower-than-average baseline Aaa credit-enhancement levels for its jumbo mortgage pools.

FIRST UNION MORTGAGE LOAN CONDUIT (LEAD ANALYST: KYRIACOS KYRIACOU)

Like ABN AMRO, First Union Mortgage Loan Conduit (FUMLC) has a baseline Aaa credit-enhancement level of 5 percent for 30-year, fixed-rate jumbo mortgage pools. This reflects the roughly average riskiness of FUMLC's loans resulting from the lack of a performance track record.

The available performance data on FUMLC's loans, though sparse, is good. However, FUMLC's regular practice has been to sell its originations on a whole-loan basis. This has made performance tracking impractical for the bulk of FUMLC's production. The absence of a track record casts uncertainty on the inferences drawn from the company's practices.

As a conduit, FUMLC purchases its loans mainly through correspondent channels. FUMLC's underwriting guidelines are typical of those for jumbo issuers generally. But unlike some jumbo MBS issuers, FUMLC deemphasizes delegated underwriting. It allows delegated underwriting for very few of its correspondents, and loans originated under a delegated underwriting process represent only a small portion of FUMLC's pools. Another positive aspect of FUMLC's pools is they often include a substantial quantity of loans originated by First Union Mortgage Corporation's retail branches.

FUMLC's approach seems promising. However, the issuer has yet to prove itself. Hence, notwithstanding the positive features of FUMLC's operation, its loan production must be viewed as no better than average until it earns its spurs. In the meantime, FUMLC's baseline level for 30-year, fixed-rate jumbo pools will stay at 5 percent. Its actual level on an individual deal, however, may be higher or lower (i.e., 4 1/2. percent or 5 1/2 percent), depending on the loan characteristics of the deal.