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Originally Posted by wiphan
You are right on. The unfortunate problem is that no one is buying Jumbo mortgages and the banks can't afford to keep them due to liquidity issues. We are keeping the cream of the crop via portfolio, but a lot of customers with good credit, good income, etc are getting hurt by the lack of investors for these products.
Yes I am sure you know who I work for and yes you are correct in the only risk that we took on.
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You are lucky in that your balance sheet is so massive you can still shelf the arm products and subsidize the lower spreads with the cross sells. But even the biggest banks can't afford to do that with the fixed rate jumbos for fear of what going yield will be when there finally is liquidity. Regardless of what anyone says, there are no true large scale portfolio lenders. The loans on the books right now are being "held for investment" and it is catch 22. If you are lucky enough to find a vulture fund or private investor that will buy your non agency paper, most often you are going to get scalped. But that isnt the worst problem. After you sell, you have to mark to market and the rest of the loans on your shelf are given a massive haircut.
To put it simply, you need to sell the loans for money but if you sell them you are going to take a huge paper bath. So what do you do? You wait...and wait...and wait. If you are wells, b of a, chase or citi, you have a zillion dollars in deposits to cover things while your loans sit in purgatory. If you are a small bank, you only have so long to wait. It doesnt take that many realized losses before you are insolvent and such is the dangers of borrowing short and lending long. Even if you are perfect and didnt make any mistakes on who you lent to, you're still going to have solvency issues because of the leverage ratios.
Bottom line? Deposits are king!
Small banks like mine are getting killed