There’s an overwhelming amount of data and headlines circulating. This column is my attempt to make sense of it all for you, the real estate professional, from an overall economic standpoint.
Many are questioning the health of the residential mortgage market during these turbulent times. Today, let’s discuss the changes taking place in the jumbo mortgage market.
What is a jumbo mortgage?
Jumbo mortgages are a type of non-conforming loan, which means that because because of the high loan amount, they are not guaranteed by the Government Sponsored Entities (GSE): Fannie Mae, Freddie Mac or Ginnie Mae.
When any mortgage is created, it’s grouped with lots of other mortgages and securitized and then sold to outside investors as what are known as mortgage backed securities (MBS). Buyers of these securities make money on the interest paid by the homeowner over time.
Today, a significant percentage of the economy is frozen, which is hitting businesses across the board.
A significant number of workers are being either furloughed or laid off completely, which means that homeowners, whether temporarily or long term, are unable to make mortgage payments, causing economic consequences.
The government has created something called “forbearance” that allows homeowners to not make their mortgage payments without penalty for a period of time.
If that happens, even though the homeowner isn’t making payments, the bondholder will still get what’s owed if the loan is guaranteed by one of the GSEs.
But that government safety net doesn’t apply to securitized jumbo mortgages.
What does this all mean?
On one side of the equation, demand for jumbo MBS product from investors has dropped significantly because of the heightened risk of the investor not being paid if the homeowner stops making mortgage payments.
Even with jumbo MBS, the bondholder should still be paid, but bondholders are worried that non-bank mortgage companies who write mortgages don’t have the capital reserves to cover these payments.
Because of these concerns, bond buyers have turned their attention to MBSs that are guaranteed by the GSEs, where they can be assured of getting paid.
On the other end, mortgage companies that write jumbo loans are afraid they won’t be able to find an investor to buy them, leaving them on the hook to the bondholder should the homeowner stop making payments.
However, as of this moment, the jumbo loan market has not disappeared entirely. There are still mortgage brokers and banks that are offering this product, but a number have suspended this program.
As we move forward, I expect to see loan guidelines regarding debt to income, credit quality and the interest rate being asked to change often for as long as market volatility continues.
Matthew Gardner is the chief economist for Windermere Real Estate, the second largest regional real estate company in the nation.