Wednesday, March 4, 2009

Why can't I get a 5% 30Y Fixed Jumbo?

The Current Recession/Depression Impacts All Borrowers

Jumbo mortgages, typically loan amounts above $417,000, are defaulting at a rapid pace as the economic crisis affects borrowers at all income levels. Bloomberg is reporting that jumbo mortgages, typically associated with higher income home owners, are becoming the next black hole for the banking and housing industry echoing concerns we have seen in our segment of the 1m+ jumbo market.

(Bloomberg) — Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest. About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. They got to that level within 10 months, almost twice as quickly as 2007 borrowers and the fastest rate since at least 1992, when LPS Applied Analytics began tracking the market.

The jump in late payments on jumbo loans, while still lower than the 20 percent delinquencies in subprime mortgages, signals that the borrowers with the most money and the best credit are hurting as the U.S. recession deepens in its second year. It also means these loans will be even more difficult to obtain and more expensive to pay off. Most of the mortgage defaults do not appear to be caused by poor loan underwriting but rather by growing job losses among high income earners. Due to the higher level of defaults, investors are becoming very reluctant to make jumbo mortgages for either purchases or refinances. Since Fannie Mae and Freddie Mac will not buy or insure jumbo loans, the lending bank must assume all the risk, keep the loan on their books and set aside additional reserves for possible losses. All of these additional risk factors are reflected in the higher jumbo rates and strict loan underwriting guidelines.

The difference in interest rates between jumbo loans and prime conforming mortgages, or mortgages eligible for sale to Fannie Mae and Freddie Mac and available to borrowers with top credit scores, had been about 40 basis points for several decades. The difference between the jumbo interest rate and the prime conforming rate was 150 basis points on Feb. 27, according to Bloomberg data.

Conforming Loans At 7%?
An interesting point to note is that the size of a mortgage loan is not the determining factor for the interest rate. Mortgage rates are based on many factors but the primary reason for higher rates on jumbo mortgages is the lack of a government agency guarantee. This implies that without price support from the government, conforming mortgages would also be in the 7% range to reflect the actual risk of mortgage lending in today’s environment.

No Relief In Sight For Jumbo Mortgage Homeowners

Given the higher risk on jumbo mortgages due to the factors cited above, homeowners who have high rate jumbo mortgages are unable to refinance to lower rates. In addition, the proposed mortgage plans meant to help distressed homeowners provides no assistance for jumbo mortgage homeowners.

While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That’s the lowest volume ever tracked by the trade publication, which has figures dating to 1990.
We have a few dozen investors that are now boosting originations, though they require a minimum 25% equity/down payment in the most expensive housing markets, up from 15-20% earlier last year. For condos, requirements can be as high as 45% equity/down payment.
If you have been able to … save for a down payment, that to us speaks volumes about your character.
Equity and cash is KING in this enviroment. FICO scores and income are great but they don't protect the investor in the unfortunate event of a default.

Some excellent 30 year fixed jumbo rates are available in the mid to low 6% range but they require a minimum of 25% equity and we find about 50% of the people that apply don't have any equity because they are in very distressed housing markets.

Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. “The million-dollar-and-above market is sinking like a lead weight,” Pasadena Luxury Homes guru Mr. Rivas says of Coldwell Banker.

Jumbo Mortgage Rates Reflect Lending Risks

Jumbo borrowers are discovering the meaning of “pricing for risk”. Mortgage lending has become a very high risk business due to the continuing decline of real estate values, the high risk of default due to economic conditions, principal impairment and/or rate reductions from loan modifications, the risk of bankruptcy court cram downs and government supported foreclosure moratoriums. Some may incorrectly believe they are entitled to a low rate mortgage regardless of risk factors. This peculiar belief by both banks and borrowers helped to create the destructive credit crisis we are now experiencing. The banks/investors are doing what they need to do with jumbo mortgages- setting rates to properly reflect risk.