Another California Crash May Hurt Jumbo Securities, Report Says

Bloomberg reports:

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.

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.

About $500 billion in prime jumbo-loan bonds are outstanding, according to a March report from Zurich-based Credit Suisse Group. Prime mortgages are considered the safest, and meet the standards of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac. Jumbo mortgages are those larger than what the government-chartered companies may buy, or above $417,000 for the past two years. Alt-A mortgages fall short of the companies' standard guidelines.

Housing Recession

The housing recession in the early 1990s in California was driven by over-appreciation in the preceding years and job losses in the defense industry, the Barclays analysts wrote. Today, a rapid rise in prices may combine with tightening lending terms to cause another crash.

For instance, Detroit-based GMAC LLC's GMAC Residential Funding Corp. and IndyMac Bancorp Inc. of Pasadena, California, no longer offer jumbo mortgages with down payments smaller than 5 percent amid lower bond investor demand, and the lenders also have tightened income-documentation requirements, they wrote.

The median resale price of a single-family home in California in July 2007 was $586,030, compared with $221,500 in December 1999, according to the California Association of Realtors.

You might want to read this one twice whether you live in California or not.California doesn't have the incomes to justify a median home price of $586,030.You'll notice that incomes didn't go up 100% in California since December of 1999.As investors get less tolerant of income qualifications on jumbo loans,the demand for houses above $400,000 will have no where but to go down.If you are renting in California,you've got a nice implied put option on housing.