Mortgage banks, seeking to lock in attractive spreads, are increasingly selling non-conforming loans to Wall Street as much as 90 days before delivery. The normal commitment period is 30 days or slightly longer.

Prudential Home Mortgage, for instance, sells at least 50% of its mortgages 90 days in advance, according to Jim Svinth, vice president of structured finance at the Clayton, Mo.-based mortgage bank.

Mortgage banks sell loans in advance by striking deals with securities dealers for prear-ranged delivery dates and specific mortgage-pool characteristics. A typical deal might call for a bank to deliver $200 million of loans with an average yield of 6.5%.

Vulnerability to Spread Shifts Limited

Generally, such deals are negotiated with ranges of acceptable characteristics, so that some slight variation of weighted average coupon or geographic distribution is acceptable, according to Ira Wagner, a director at First Boston Corp.

The main reason mortgage banks like the system seems to be that it limits their vulnerability to fluctuations in the spread between nonconforming loans and loans by Fannie Mae and Freddie Mac. These spreads can be as much as 150 basis points tighter than two or three years ago.

Losing One Risk, Taking On Another

A holder of jumbo loans could wake up tomorrow to find that the spread between jumbos and Fannies could have widened by 50 basis points, said William Moffatt, executive vice president of Plaza Home Mortgage, Santa Ana, Calif.

Essentially, mortgage banks that sell product in advance lose this risk but take on a new one. Companies are betting that they can accurately forecast the size and composition of their pipelines far in advance.

There have been no major public catastrophes -- situations where mortgage banks were unable to meet their forward delivery commitments. But Mr. Wagner said, "You could get a situation where someone commits to a coupon and the market rallies steeply. I don't know what they'd do."

According to market sources, mortgage banks can take serious hits when they cannot deliver as promised and must negotiate new terms at the last minute.

Another factor facing banks selling forward is the fact that prices are discounted -- by about 38 basis points for every 30 days, according to Mr. Moffatt.

"What a mortgage bank which wants to sell out 90 days has to ask itself is, can they hedge it cheaper?" he said. This is further complicated by the lack of a hedge exactly mirroring the relationship between government and nongovernment mortgages.

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