Hybrids Fuel Jumbo RMBS Volume

Prime jumbo issuance of $51 billion in fourth quarter 2005 fell 20% from the third quarter due to rising interest rates and general uncertainty in the economy, but issuance was 24% higher than in the comparable period a year earlier, according to Standard & Poor’s latest Trends in U.S. Residential Mortgage Products report for the jumbo sector.

S&P rated $230 billion in prime jumbo transactions in the fourth quarter last year, 14% more than in 2004, the report said. The increase was mainly due to the increase in affordability products, including the recently-introduced fixed interest-only product, which comprised $7 billion of the rated transactions.

Hybrid IO loans reportedly made up 38% of the rated prime jumbo issuance in 2005 — the largest share and “an impressive expansion” from a 28% share the prior year and just over 1% upon its introduction in 2003, S&P said.

“However, Hybrid IO issuance slowed down by 33% in fourth-quarter 2005 from the third quarter, raising questions about whether demand for the product will continue to increase in 2006,” S&P noted.

Option adjustable-rate mortgages more than doubled from 2004 to 21% of the rated transactions, the ratings agency reported.

Refinances represented 23% of the rated issuance, cashout loan issuance accounted for 30% and the remaining 47% were purchase transactions, according to the report.

The ratings agency reported a 41% annual increase in cashout loan issuance as homeowners continued to take advantage of house price appreciation to extract equity from their homes. But cashout activity was off record highs in the third and second quarters.

“It remains to be seen whether the small decrease in cashout issuance is a temporary drop related to the overall decrease in issuance levels in the fourth quarter, or whether it speaks to a larger trend of decreasing tolerance for cashout loans given that the market expects house price appreciation to increase in the low single digits in 2006,” S&P added.

The average prime jumbo loan balance in fourth-quarter deals reportedly increased about 3% from the third quarter to $508,834.

Last year, less than half of prime jumbo loans issued had either one or two years of income documentation the report said. Stated-income loan issuance increased significantly last year to $97 billion — soaring from $2 billion in 2001.

S&P anticipates a decrease in prime jumbo issuance volume due to expectations of rising interest rates and slowdown in home price appreciation. If that occurs and competition among lenders increases, the proportion of loans originated with verbal or no documentation is likely to further increase, according to the report.