Not all jumbo issuers are alike

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

Some market participants seek to promote the false notion of fungibility. This offers opportunities to others willing to probe deeper in order to discern differences. At the end of the day, the name of the game for investors is not to hold a security backed by a weak pool with insufficient enhancement during an economic downturn. Understanding the differences in credit quality among the jumbo pools from different MBS issuers can help investors have the winning edge.

Issuer summaries

ABN AMRO (LEAD ANALYST: ROGER HUANG)

ABN AMRO, a relative newcomer to the market, has a baseline Aaa credit-enhancement level of 5 percent for 30-year, fixed-rate jumbo mortgage pools. This reflects the slightly higher than average riskiness of ABN AMRO's loans. The risk profile of the loans is driven by an origination strategy that is more than 90 percent wholesale and the absence of a proven track record, each of which adds uncertainty about pool performance. These weaknesses are balanced by strong underwriting standards.

ABN AMRO's origination channel strongly emphasizes broker originations. Correspondent channels account for only a small portion of the overall production. The company delegates the reunderwriting of all jumbo loans to United Guaranty Residential Insurance (UG), an unaffiliated mortgage insurer. This arrangement gives ABN AMRO the benefit of UG's experience, but with some sacrifice of control. However, ABN AMRO has an extremely strict policy on its underwriting guidelines: The company asserts that it allows absolutely no exceptions.

The directly measurable characteristics of ABN AMRO's loans are normal in most respects. However, one feature stands out: 100 percent of ABN AMRO's loans have full documentation; none have "reduced" or "limited" documentation verifying borrowers' income, All other things being equal, this should exert a positive influence on the credit performance of ABN AMRO's pools.

ABN AMRO's acquisition of certain mortgage banking subsidiaries has added uncertainty to performance predictions. The company acquired LaSalle Bank in 1993 and Standard Federal Bancorporation in 1997. Through these subsidiaries, ABN AMRO controls LaSalle Home Mortgage Corporation, a mortgage banking subsidiary of LaSalle Bank; and InterFirst, a mortgage banking subsidiary of Standard Federal.

ABN AMRO has sought to achieve synergy across these entities by having each of its acquired mortgage banking subsidiaries focus on its respective area of strength. Under the present operating arrangement, LaSalle Home Mortgage focuses on servicing and retail originations, and InterFirst focuses on wholesale originations. Although InterFirst had established a reasonable performance record as an originator of jumbo mortgage loans, the reallocation of functions between the company and LaSalle Home Mortgage diminishes the reliability of that record as a performance predictor for newly originated pools. Thus, new pools from ABN AMRO possess more potential for volatility than do pools from other jumbo MBS issuers with steadier, uninterrupted operating histories.