Not all jumbo issuers are alike

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

BOA's loan pools typically possess better-than-average loan characteristics (i.e., high FICO scores, low debt-to-income ratios, predominantly owner-occupied properties, etc.). However, the pools also nave a tendency toward high California concentrations, which typically increase volatility in performance projections. But compared with other lenders, the California concentration issue for BOA is less of a negative factor.

BOA has in prior years demonstrated a genuine facility for limiting performance volatility, particularly during periods of economic stress in California. As well, the company has maintained a high level of intrastate diversity in its pools and has been expanding its loan originations outside California. Hence this chink in the BOA armor has not affected - and is not likely to affect - the company's status as a member of the 4 percent club.

CENDANT MORTGAGE CORPORATION

[FORMERLY PHH MORTGAGE] (LEAD ANALYST: ANDREW LIPTON)

Distinguished by its singular origination strategies and channels, and by the quality of its collateral valuations, Cendant Mortgage has established itself as an excellent originator of mortgage loans. As such, the company has a baseline Aaa credit-enhancement level of 4 percent for 30-year, fixed-rate jumbo mortgage pools. However, when Cendant forms a pool of such loans with a high concentration in California, the actual Aaa credit-enhancement level may be 4 1/4 percent or 4 1/2 percent.

Cendant has built a high-caliber national mortgage business by refining its business model into a business maxim: Get close to the customer. To do so, the company has effectively implemented a two-pronged, innovative strategy. With no storefront retail outlets of its own, Cendant relies upon a strong affinity program and a far-flung network of affiliated national real estate brokers. Together, these channels have enabled Cendant to better assess the needs of its borrowers and the accuracy of its loan information.

Through its affinity program, for example, the company has forged relationships with entities such as USAA (an independent auto insurance company and savings bank whose members are retired or current military officers) and the Independent Bankers Association of America. Some of these organizations tend to attract a membership that has strong credit characteristics. Although the relationship between Cendant and each group varies, generally the affinity entity helps market Cendant mortgages among its members. The program has proved an unqualified success: Approximately 18 percent of Cendant's current 30-year, fixed-rate jumbo loan production is made to affinity group members who call the lender directly.

Direct relationships, too, are the touchstone of Cendant's wholesale-origination channel. Here the company depends upon a vast network of real estate brokers that are part of the Cendant family, including Century 21, ERA and Coldwell Banker, as well as other brokers who do business with Cendant's affiliated relocation company. Many of the real estate brokers are affiliated with mortgage bankers and brokers who take loan applications from potential borrowers and pass them on to Cendant, which underwrites each application according to its own guidelines. But the close, long-standing relationships Cendant has developed with the real estate brokers gives the company more confidence in the reliability of the information in the applications it receives from affiliated mortgage bankers and brokers.