Jumbo Loans Said to Pose Prepayment Risk for Buyer Of Prudential's

The servicing portfolio up for sale along with Prudential Home Mortgage has some mortgage bankers wary.

They say the $76 billion portfolio's high concentration of jumbo loans leaves it open to prepayment risk. That's because payment patterns on jumbo loans - those over the $203,150 limit for purchase by Fannie Mae and Freddie Mac - are notoriously difficult to predict.

"It is everyone's perception that jumbo loans prepay faster than conventional loans," said an industry insider. "The real issue is that jumbos are more difficult to hedge because they are less predictable."

But officials at Residential Services Corporation of America, which owns Prudential Home Mortgage, say such concerns are overblown.

"The nonconforming loans get a lot more talk than they really deserve," said Rick Thornberry, a managing director of the firm, which is based in Clayton, Mo.

Jumbo loans make up 45% of the portfolio's dollar amount, with an average value of $136,000, Mr. Thornberry said. The rest of the portfolio is 20% government loans and 35% conforming loans. The average weighted coupon is 7.74%, as of March 31.

In a telephone interview last week, Mr. Thornberry said Prudential has been "aggressively hedging" the portfolio for two years. And the results, he said, have been just fine.

"Our performance to date indicates that," he said.

"I don't think it is valid that people are concerned," Mr. Thornberry said. Of disproportionate prepayment risk for jumbo loans, he added, "We haven't found that to be the case."

Most of the jumbo loans came from Prudential's relationships with other lenders, Mr. Thornberry said. But because this conduit business is not as active as it once was, he said, the number of jumbos in the portfolio is not growing as quickly as other loans.

He stressed that jumbo loans can be lucrative for cross-selling opportunities. They are also more profitable because they bring in more money than conforming loans yet cost the same to service.

Another feature of Prudential's portfolio that has not been discussed much by observers is its delinquency rate, which is better than average.

Its delinquency rate for conventional loans was 1.36% on March 31, versus an industry average, according to the Mortgage Bankers Association of America, of 2.45%.

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