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.

Musical Mortgage Chairs!

In speaking to investors, clients and realtors; I came away with the idea that the mortgage freeze is like a game of musical chairs. Some of us can remember the feeling of scrambling for that last chair as the music stopped. Many property investors that have a large number of single family home rentals(10-15 in some cases) are trying to grab at financing that doesn't exist in today's mortgage market. They will be forced to sell. Many investors are barely holding onto rentals that only made sense for the property appreciation that happened between 2001-2006. The negative cashflow was big to the tune of 1-2k a month with the taxes and insurance per house. Many of these folks took interest only mortgages or negative amortization loans because they were really betting that housing would rise in the next few years and they could sell with huge gains. Now that housing prices are falling; the music has stopped, but so many people just don't realize it yet. Did you know the music stopped a few months ago? Better find that last chair.

Countrywide Mortgage in Liquidity Crisis.

Forbes 8-6-7:
"Countrywide Financial offered hope Monday that it might avoid the fate of other troubled lenders. The mortgage company revealed that it has cash access that could help it survive brutal industry conditions. In Monday filings with the Securities and Exchange Commission Countrywide revealed it has $186.5 billion in available liquidity. It also said it has access to $46.2 billion in highly reliable short-term funding. "

Fast forward ten long days. Today we were greeted by another bad sign that mortgage markets have stopped working. Countrywide is the largest lender in the country. They originate through retail and broker channels roughly 20% of all mortgage loans. They funded $40 billion last month. This is not subprime, or ALT A, the majority of these loans are very prime mortgage loans to folks fully documenting their income. They were forced to tap a line of credit they have to the tune of $11.9 billion. They did this because they couldn't use their traditional financing of borrowing in the short term commercial paper market. This is bad in that the largest lender in the country is not being trusted by the global community to lend money to on a very short term basis.

The impact of these events and others to follow is that mortgage rates will likely continue to rise for any mortgage loan that doesn't fall into the conforming guidelines of Fannie Mae or Freddie Mac. This will have large ripple effects throughout the financial community and especially so in housing over the coming days. The rates for non-conforming loans is between 6.75-7.75% for scenarios of putting 20% down, fully documenting income, and prime credit levels. This is up from the high 6% range. This is putting pressure on the $650-$1.5m market. This can be clearly illustrated by our friends at Above these values you move into super jumbo mortgage rates and they have been in the 8-10% range for most scenarios. I have to get back to the grind. Stay sane and remember that Rome isn't burning, it's just a little smoke.