The limited availability and high cost of "jumbo" loans not backed by the government is taking a toll on sales of high-priced homes, a trend that’s rippling through housing markets and the economy, according to a new research report by the National Association of Realtors.
The report floats the idea of temporarily lifting the $729,750 conforming loan limit in place for high-cost markets, using government bailout money to expand jumbo lending, and encouraging more competition among lenders by facilitating warehouse lending to small- and medium-sized lenders.
Homes priced above $750,000 accounted for 4.4 percent of sales in 2007, but this year represent only 2.3 percent of sales, NAR said. The months’ supply of high-priced homes has risen from 18.7 months to 41.1 months during the same period, compared with 10 months of inventory for all homes.
Rising inventories put downward pressure on home prices, and the reduced availability of jumbo loans appears to have worked its way through much of the market, NAR said.
In addition, many homeowners are unable to refinance their existing jumbo loans to take advantage of lower rates, which has contributed to a rise in default rates and crimped consumer spending. Many jumbo loan holders could save $6,000 to $15,000 in annual interest costs if they were able to refinance, the report said.
The secondary market for jumbo loans fell apart in late 2007, when investors stopped buying mortgage-backed securities not backed by Fannie Mae, Freddie Mac or the Federal Housing Administration. Because lenders must now hold such loans as investments, they’ve instituted stricter underwriting standards and are charging higher interest rates.
While rates on conforming mortgages eligible for purchase by Fannie and Freddie are near historic lows, the "spread" between jumbo and conforming mortgage rates has increased to between 150 and 200 basis points. Before the credit crunch, rates on jumbo mortgages were 20 to 50 basis points above rates on conforming mortgages (one basis point is one hundredth of a percent).
Although jumbo loans are often thought of as primarily for the wealthy, they are also a necessity for many middle-class families in high-cost coastal states, NAR said. Jumbo loans (those greater than $417,000) accounted for 30 percent of the dollar volume of mortgages originated in 2007. The share was much higher in California (63 percent), New York (51 percent), and Florida (29 percent).
Congress last year raised the conforming limit in high-cost markets to up to $729,750. But underwriting standards on "super-conforming" mortgages remain stricter than those for conforming mortgages under the $417,000 conforming loan limit that remains in place for "normal" housing markets.
Borrowers generally need FICO scores of at least 700 to obtain fixed-rate super-conforming mortgages, and to provide at least a 10 percent down payment. Freddie Mac is requiring down payments of at least 20 percent for loans above $625,500 (see story).
According to NAR, 60 percent of recent home purchasers who used jumbo loans made down payments of at least 20 percent. In California, more than 75 percent of recent home purchasers who used jumbo loans put at least 20 percent down.
"Such high down-payment requirements have no doubt deterred buyers, leading to higher inventories, falling home prices, and rising defaults," NAR said.
In a recent survey of Realtors, 85 percent said buyers appear to be dropping out of the market because they can’t get jumbo mortgages or don’t want to pay higher rates.
Although NAR’s report does not address the issue, the recent "stress tests" by bank regulators measuring the ability of financial institutions to weather a severe downturn could result in further tightening in jumbo lending.
Regulators said the stress tests showed 10 of the nation’s 19 largest banks needed to raise $74.6 billion in capital between them. The banks regulators said must raise the largest sums — Bank of America ($33.9 billion), Wells Fargo ($13.7 billion) and GMAC ($11.5 billion) — are big players in mortgage lending.
In general, the need to raise capital can constrict new lending, because new loans create additional capital requirements. Regulators base lenders’ capital requirements, in part, on the dollar amount of loans outstanding, and projected losses on those loans and other investments.
The results of the stress tests shouldn’t have any impact on conforming mortgages, because lenders can sell the loans they originate to Fannie and Freddie, said Tom Kelly, a spokesman for Chase, the consumer and commercial banking business of JPMorgan Chase & Co. Kelly said conforming loans have made up more than 90 percent of Chase’s originations in recent months.
"In terms of whether to do more jumbos or not, it’s a decision about pricing, risk and whether holding jumbo loans on your balance sheet is the best use of your capital," Kelly said. "The secondary market for jumbo loans has not returned at all, so each individual bank has to decide, one, do they have the capital, and two, do you want to use that capital?"
Bank of America and Wells Fargo did not respond to requests for comment.
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