SIFMA "wrong" on jumbo loans: Fannie Mae CEO

By Al Yoon

NEW YORK (Reuters) - U.S. housing benefits from the increase in Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) loan limits were stunted by a bond group that last week said the jumbo mortgages must be isolated from the main mortgage securities market, Fannie Mae Chief Executive Officer Daniel Mudd said on Wednesday.

The decision by the bond lobbying group will require traders develop a new market, instead of adapting the current one prized for its liquidity, he said at the Reuters Housing Summit, by telephone.

The Securities Industry and Financial Markets Association on Friday deemed the market, known as "to-be-announced," or TBA, off-limits for jumbo loans since the larger mortgages would taint the fungibility of the pools. By adding larger loans to the TBA pools, traders have said they would demand lower prices since jumbos present greater interest-rate risk.

"We think that was the wrong decision" by SIFMA, Mudd told Reuters. "A separate market is effectively going to have to be established and created for (jumbos.) As a result of that, the impact will take longer to be realized."

The increase in loan limits for the government-sponsored enterprises to $729,750 in some areas was part of the economic stimulus package signed into law by President George W. Bush last week. By allowing GSEs to guarantee the loans, lawmakers are hoping to draw new buyers and reduce jumbo loan rates that lenders have jacked up due to poor investor demand.

TBA bonds feed the $4.5 trillion "agency" mortgage-backed securities market, which has been relatively steady as other, non-guaranteed, mortgage bonds backed by riskier loans have upended global markets.

It was a rare disagreement between Fannie Mae and SIFMA, which represents Wall Street dealers that profit from trading with the company in MBS and interest-rate derivatives, and on underwriting fees from regular sales of the company's senior debt. But Freddie Mac earlier this month said it favored keeping jumbos separate.

Bond traders and Fannie Mae rival Freddie Mac argued that including jumbo loans in TBA pools would eventually raise costs for borrowers with standard loans of $417,000 or less. In the TBA market, an investor buys the security without knowing all loan attributes, and must assume he will get the worst ones when the actual bond is delivered.

Jumbo loans are more apt to be refinanced when rates become attractive, boosting the expected pace of early principal repayment. Faster-than-expected prepayments when rates are falling reduces the value of the MBS.

A better alternative would have been to limit the amount of jumbo loans allowed in a TBA pool, Mudd said.

Fannie Mae preferred "a de minimus rule that says in a given mortgage-backed security you could have, let's make up a number, no more than 5 or 10 percent of loans" be jumbos in TBA, he said.

Fannie Mae will take about a month to begin its jumbo business after the Department of Housing and Urban Development informs it of what high-cost areas of the U.S. qualify for the larger loan limit, he said.

(For summit blog: summitnotebook.reuters.com/)

(Additional reporting by Lynn Adler)