Thursday, August 16, 2007

Jumbo Mortgage Meltdown Freezes Luxury Housing



The media has done a very poor job of relaying the collapse in the jumbo mortgage market. The term jumbo mortgage loan refers to any loan that is higher than the maximum dollar amount established in Fannie Mae and Freddie Mac's guidelines. At this time, any loan for a single family property greater than $417,000 is considered a jumbo loan. The limits increase to $533,850 for two-unit properties, $645,300 for triplexes and $801,950 for 4-unit homes. There are also some areas of the Country where the limits are higher including Alaska and Hawaii.
But, what does that mean for housing in high cost areas like CA, NY, FL, etc? The guidelines for doing a jumbo mortgage have tightened dramatically in the last few days. Lenders such as Indymac, Countrywide and WAMU have increased reserve requirements and stopped taking stated income for loans with less than 20% down. The interest rates for full doc jumbo loans in CA have risen by .50-.75% for the most prime credit worthy borrowers. A client making $200k gross income(everybody right?), with 1k monthly payments on the credit report for cars, putting 20% down qualified for an 825k purchase using standard debt to income ratios two weeks ago. You move rates to 7.75% and the client only qualifies for 777k. Jumbo mortgage rates are averaging 7.75% for this scenario for a 30Y fixed. Which everyone should have, it makes no sense to gamble with an adjustable if you are planning to live in the home more than a few years.
As the guidelines continue to tighten, and the reality of the freeze in the jumbo market sets in you will see sellers drop their prices as we move toward the credit freeze of winter. Buyers can no longer go to their mortgage lender and get the rocket fuel financing that propelled the luxury market between 650k-1.5m. Above these loan sizes clients tend to have substantial active and passive income from stocks, bonds, and small businesses to manage almost any lending squeeze. Working class vs asset class. Don't worry about the rich, they always find a way to make it. Keep your head on and remember it's never different this time. Please post your thoughts.

6 comments:

Westside Bubble said...

Thanks (also see Paper Money's new post today).

And a couple of questions:

"stopped taking stated income for loans with less than 20% down"

Is stated income still ok as long as there's 20% down? Is less than 20% down ok with documented income? How much less than 20%?

"using standard debt to income ratios two weeks ago"

How have these ratios changed recently, and do you expect further tightening?

Mr.Mortgage said...

Is stated income still ok as long as there's 20% down? Is less than 20% down ok with documented income? How much less than 20%?

Yes, going full doc a client has to come in with 5% down to get any reasonable pricing. The rates on the second mortgages are around 10% also. This is up from 8.25% for clients with perfect FICO and excellent income.

Stated income is OK with at least 10% down required. The rates are in the 8-9% range on the first. Very few clients go this direction as the rates are very high since the jumbo market freeze.

How have these ratios changed recently, and do you expect further tightening?
The debt to income ratios have gotten tighter in the last two weeks. I would expect all banks to move down to more responsible levels over the next days. Remember as a mortgage investor, which loans would you want to buy from the mortgage bank: 35% DTI or 50% DTI. At the end of the day, it's the risk level the market will stand for a given loan scenario.

va said...

I think that they will raise loan liits on conforming, va, and FHA loans to help alleviate this problem I think that the raise will happen in 2008 sometime. We will see!

Baton Rouge Commercial Real Estate said...

I think the Meltdown has come and gone now. Times are getting better in our biz

Jay said...

I agree that times are getting better. But mortgage companies are getting very strict, some requested no less than 20% down.

Jay said...

I agree that things are getting better, but loans companies are getting very strick, requesting no less than 20% down.