Jumbo loans to be isolated from mortgage TBA: SIFMA

NEW YORK (Reuters) - Jumbo mortgages now eligible for purchase by the nation's largest home loan finance companies will be locked out of the market where trading helps lower rates to consumers, according to an industry group.

SIFMA on Friday said it soon would update its position on jumbo loans and the so-called to-be-announced market (TBA), which is prized for its liquidity and where traders buy and sell MBS before they are created. Fannie Mae (FNM.N) and Freddie Mac (FRE.N) will have to package the loans outside of this market.

The government-sponsored enterprises can temporarily purchase and guarantee loans above the traditional "conforming" size of $417,000 as part of the economic stimulus package signed into law by President George W. Bush on Wednesday.

The higher limit was made to help reduce the rates of jumbo loans up to $729,750 that have jumped in relation to smaller ones because investors have shunned non-guaranteed debt. But traders concerned that the main market for "agency" mortgage bonds would be hurt by the sudden adoption of large loans led to the review by the Securities Industry and Financial Markets Association, traders said.

The larger the loan, the more apt it is to be refinanced when rates are attractive, thus boosting the expected pace of early principal repayment. Faster-than-expected prepayments when rates are falling reduces the value of MBS.

Including jumbo loans in TBA pools would have had the unintended effect of raising rates on traditional conforming loans since investors assume they will receive the larger loans when they take delivery of the bonds, according to Freddie Mac. In TBA, the loans must be deemed fungible, so investors buy without knowing attributes.

Isolating jumbo loans is the "least disruptive option" for the market where the GSEs can provide "rate relief to higher balance loan borrowers while not imposing additional costs or impairing liquidity" for others, Sean Davy, managing director of SIFMA's MBS and securitized products division, said in a statement.

Rates on jumbo loans are still expected to decline given the new Fannie Mae and Freddie Mac funding, but remain higher relative to mortgages of $417,000 or less, analysts said.

Freddie Mac, the second biggest provider of loans into the TBA market, last week told Reuters it intended to put jumbo loans into separate pools.

(Reporting by Al Yoon; Editing by Diane Craft)