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Prime Jumbo to Conforming Spread at Historic Wide Levels
August 2007 --
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As a
follow-up to our research report last week, we note that the
benchmark spread between the prime non-agency jumbo rate and
the agency conforming rate (i.e. the non-agency basis) has
gapped to its widest level in the history of the securitized
mortgage market. As the Figure below
illustrates, in a period of just four weeks this spread has
increased from its normal range of 20 basis points to
nearly 80 basis points- far exceeding all prior periods of
non-agency spread widening.
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This sharp
move in the basis provides clear evidence that mortgage
credit is tightening well beyond the subprime sector.
It is important to note that heightened credit fears and
severely diminished liquidity have been the key drivers
behind this dramatic move in spreads. There has been no
fundamental deterioration in prime mortgage credit
performance to justify a move of this
magnitude.
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Although
liquidity pressures are likely to persist in the near
future, the widening in the non-agency basis presents
mortgage investors with a historic opportunity to add AAA
mortgage assets backed by prime non-agency borrowers at
all-time attractive levels.
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