State Jumbo Loan Securities Vulnerable

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Securities backed by prime U.S. jumbo mortgages may be riskier than investors think because almost half of the underlying loans are from California, where home prices may again collapse, according to Barclays PLC, Bloomberg News reports.


California accounts for 45 percent of jumbo mortgages in securities sold last year, up from 35 percent in 1989, Barclays mortgage-bond analysts wrote in a report yesterday. Following a housing boom, home prices in California declined by 12.5 percent between 1991 and 1995. Losses after foreclosures on jumbo loans securitized in 1989 rose to 3 percent, which would be enough to cause many current investment-grade bonds to default.


“The current housing environment in California appears similar to the 1990s,” wrote the New York-based analysts led by Ajay Rajadhyaksha. “Many investors believe that jumbo credit is sound. We think that this sense of security is misplaced.”


As demand wanes for non-guaranteed mortgages bonds amid tightened bond-financing terms and the highest U.S. foreclosure rate on record, jumbos have fared better than their counterparts. Earlier this month, investors offered to pay 75 cents per $100 more for fixed-rated prime jumbo securities than for similar non- jumbo Alt-A debt, according to Deutsche Bank AG.


Read the full Bloomberg News story

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