In springtime, when all things hopeful and botanical bloom, there was a widespread sprouting of press announcements, particularly from the major banks, about increased dollars allocated to the business of jumbo loans.
Alas, the soil for such pronouncements has proven poor. A dearth of jumbos persists and the market appears to be wilting.
As an executive at one mortgage research company told me, earlier this year there was a flurry of activity with Bank of America and other major banks announcing jumbo loan programs, "but I haven't heard anything since then. The market doesn't appear to have changed much. I think some of these announcements were made to generate good press. The banks were saying, 'Hey, we are open for business -- don't forget us,' but they weren't doing anything more than what they were doing before."
Jumbo loans are basically any mortgage where the principal amount exceeds the statutory purchase limit of Fannie Mae and Freddie Mac, which has been set at $417,000 (Congress raised the upper limit in some high-cost areas to $729,750). In other words, with a conventional mortgage, Fannie Mae and Freddie Mac will buy the loan from the lender in the secondary market.
The agencies won't purchase jumbos, which in the past were securitized and bought by private investors. That process completely closed down with the onset of the recession and the collapse of the credit markets.
If you're BofA, or even ING Direct, which is also offering jumbo loans, then the loans have to be held in the bank's portfolio. Hence, these lenders are being very circumspect about the loans they make since they can no longer shed the risk to other investors.
"Lenders that have stepped into this space are predominantly portfolio lenders, so they are a little more restrictive in the kinds of loans they are interested in writing," notes Keith Gumbinger, vice president of HSH Associates Financial Publishers in Pompton Plains, N.J. "Fewer outlets are interested in lending them and when you do find them, the terms and credit restrictions are definitely tougher than they have been."
Back in March, an Inman News story reported that BofA had cut interest rates on jumbo mortgage loans in the hopes of expanding its share of the market. Nevertheless, borrowers would still need strong credit (minimum 720 FICO score), at least a 20 percent downpayment, and assets sufficient to cover six months of payments.
In general, the big banks don't have attractive rates on jumbos and "are very strict in regard to underwriting and property valuations," says Dan Cutaia, president and chief operating officer of Fairway Independent Mortgage Corp. in Sun Prairie, Wis. "Unless you have a lot of equity and you are 'gold' to a lender, it will be difficult to find a jumbo loan, and if you do, you are going to pay a significant market premium."
Fairway Independent Mortgage has been writing jumbo loans, which it brokers to companies like ING, but the deal has to be "absolutely golden," with lots of equity and great credit. In short, the borrower has to be perfect.
Before the credit crisis, Fairway Independent did about 15 percent of its lending in the jumbo category; well into third-quarter 2009 the company wrote just over $2 billion in jumbos, which is less than 5 percent of its overall lending.
The good news is that prime-quality jumbo loans have a better history of defaults than conventional loans, which translates into a better risk profile on an individual loan basis. In a portfolio of loans, everything changes.
If $100 million of conventional loans came to market (which isn't happening, but let's fantasize), that could mean 1,000 loans of $100,000, or 100 loans at $1 million. Just a couple of loan failures in the jumbo portfolio could be more devastating than a higher number of failures in the conventional portfolio. In other words, actual losses could be higher with jumbos although the percentage of losses is lower.
The bad news with the jumbo-loan sector is that things could get worse before they get better.
"The big issue is that there are a trillion dollars of jumbo mortgages out there and these mortgage holders do not qualify for the federal government's modification plans. Many of these people are now having financial difficulty," says Steve Ozonian, executive chairman of Irvine, Calif.-based Sorrento Capital.
So far, the industry has not experienced a sizable destruction in jumbo-loan mortgage portfolios, as individuals who took these loans boasted good incomes at the time they signed their mortgage documents.
Since then, some of these good folk have lost their jobs.
Fortunately, when the now unemployed got their jumbo loans back in the mortgage heyday years between 2002-07, they were able to also get from the lender significant lines of credit, in some cases upward of $1 million. Ozonian believes a lot of the unemployed jumbo borrowers are using their lines of credit to continue to make mortgage payments.
The higher-end home market could experience a higher proportion of defaults and REOs at the end of this year and through 2010, says Ozonian. "The amount of jumbo-loan defaults will accelerate if we don't allow people to modify, refi, or get out from under these homes."
If Ozonian's prediction comes to bear, the already narrow jumbo loan market will squeeze down even further.
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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