Not all jumbo issuers are alike

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

Strong as Chase's underwriting guidelines now are, they were not that easy to implement after the Chase-Chemical merger. The blending of the companies required that their differing underwriting philosophies be blended too. This took time to accomplish - and created adjustment difficulties for underwriters.

Chase contends that this adjustment period is now over. This may be, but the larger ramifications of the merger cannot be as easily smoothed over, as the unusually strong credit culture of the"old Chase" has now been fused with the more market-oriented approach of Chemical. As a result, the loans that are originated by Chase today are no longer produced with the solitary goal that they be strong enough to be held in the company's own portfolio; now such loans are originated principally to meet investor demand. Thus, from a mortgage credit-quality vantage point, it is fair to say that the Chase of today is not quite the same as the pre-merger Chase.

Chase originates about a third of its A-quality business through retail branches. All other things being equal, retail loan originations are likely to perform better than loans originated through wholesale channels because of the originator's ability to deal directly with the borrower and better gauge the accuracy of the information in the loan application.

The directly quantifiable characteristics of Chase's pools remain fairly typical for the jumbo, 30-year, fixed-rate mortgage market. Geographic diversity, however, tends to be better than comparable pools of other issuers; whereas the amount of cash-out refinancings, especially in Chase's recent 30-year pools, tends to be higher, thereby increasing the risk of the pools.

The pre-merger Chase did approximately 45 securitizations from 1990 to 1994. Since 1995, Chase has sold its production primarily in the whole-loan market, but is now reentering the securitization market. In the aggregate, Chase's loans have performed quite well; the delinquencies and losses are consistently low. Chemical did far fewer securitizations in the 1990s and, although the overall performance has been good, delinquencies are higher than in the Chase securitizations.

As things stand now, Chase remains a strong issuer with an equally strong performance record. Uncertainties arising from the merger with Chemical, however, continue to blur predictions about Chase's future - and the future direction of its baseline credit-enhancement level.

CITICORP MORTGAGE (LEAD ANALYST: DAVID TEICHER)

Citicorp Mortgage Securities, Inc., has a baseline Aaa credit-enhancement level of 5 1/2 percent for 30-year, fixed-rate, jumbo mortgage loans. This reflects the higher-than-average risk of Citicorp's pools. The riskiness of Citicorp's pools comes primarily from uncertainty about its business practices and strategy, and the poor historical performance of its securitizations.

Citicorp's older transactions have had very poor performance, as illustrated in Figure 2. In addition to having some of the highest losses of any of the major MBS issuers, Citicorp also has had the greatest variability of losses. In the past few years, however, the performance of Citicorp's transactions has improved dramatically. But this decline in losses has occurred during only a short period of time and has been accompanied by a sharp decline in origination volume. This calls into question whether Citicorp's improved pool performance can be sustained, especially as origination volume increases.