Later this week an American Securitization Forum (ASF) committee is expected to vote on TBA delivery rule changes, possibly increasing the Jumbo loan limit to 20% from the 10% it is currently.
In a recent report, Deutsche Bank Securities analysts noted that several large originators recently made a presentation to the ASF committee that deals with this issue advocating for the increase as Jumbo conforming loan originations have increased so much that originators could not fit all their production into the 10% limit on TBA-deliverable pools.
Analysts said that approving the change would increase negative convexity of the TBA market as unlike the 2006-2007 originations, 2008-2009 has been written to very tight credit standards.
“High credit-worthiness correlates to fast premium prepayment speeds,” they noted. They said that in the past six months, 2008 vintage premium jumbo FNMA 5.5s have prepaid at nearly 50 CPR in aggregate versus peak speeds of around 30 CPR on non-jumbo FN 5.5s.
Agency Jumbo 4.5 through 5.5 pools currently trade 20-30 ticks behind TBAs due to their higher option cost, which appears fairly priced, Deutsche analysts said.
However, raising the limit to 20% from 10% would drive down TBA values by 2 ticks for 4.5s, 2.5 ticks for 5s and 3 ticks for 5.5s, they calculated.
In addition to that negative impact to the TBA market analysts said it would produce more stratification and new specified pool categories, “leading to further deterioration in the TBA deliverable,” and also would not be helpful to the liquidity of the market.
At this time, Deutsche MBS analysts said they do not see much value in owning Jumbo agency pools at the current market price concessions to TBA. This is because of the “inferior convexity and liquidity” versus TBAs without even a carry advantage to compensate.