Jumbo-Mortgage Market Gets Backing From a Big Player

NEW YORK (TheStreet) -- Redwood Trust(RWT) will continue to buy and securitize prime jumbo loans in 2013, despite new mortgage rules that would make it riskier to do so.

The mortgage REIT (real estate investment trust), which reported fourth-quarter results Thursday, said it plans to acquire and package into securities $7 billion in residential mortgages in 2013, up from $2.3 billion in 2012.

The acquisitions are expected to be predominantly prime jumbo loans that are too large to be sold to government-sponsored enterprises Fannie Mae(FNMA) and Freddie Mac(FMCC) . Currently, the agencies buy mortgages up to a limit of $ 417,000 in most areas and over $625,500 in high-cost regions.

Redwood and Credit Suisse(CS) have been the two active players in the jumbo-mortgage market at a time when few others will touch them.

Bond investors have largely been unwilling to buy mortgage-backed securities that don't have a government guarantee, and since the agencies don't back loans greater than $625,500, new originations of jumbo loans have consequently shrunk from $480 billion in 2006 to $148 billion in 2012, according to data from Royal Bank of Scotland and Inside Mortgage Finance.

While there are signs that the private U.S. mortgage market is rising from the dead, the future for jumbo loans remains under a cloud.

The Consumer Financial Protection Bureau recently issued a rule that provides lenders and investors greater legal protection for making "qualified mortgages" -- loans that do not have excess upfront points and fees, have no toxic features such as interest-only loans, negative amortization and balloon payments, and where the borrower does not spend more than 43% of his income to pay down debt.

According to analysts from Deutsche Bank, the rule, which goes into effect in January 2014, is expected to "significantly curtail the demand for jumbo loans," because at least 13% of these loans are either interest-only or above the debt-to-income limit of 43%.