Wednesday, February 24, 2010

Fixed Jumbo Mortgage Rates at Historic Lows

Cross post.

Los Angeles Feb 24th (

Warning: A little technical.This is the Whole Wheat 8 Grain Variety of our ongoing commentary on the jumbo mortgage market.

As the top chart shows, 30-year fixed rate jumbo mortgage rates are going for a post-crisis low, a rate not seen since 2005. With a few scattered exceptions, the rate you get today is about as low as it has ever been in history. Conforming rates are still very close to all-time lows.

As the second chart shows, the Federal Reserve has put on the books about $1.25T of mortgage securities(tan section) which completes the program as announced. Anything could change as the conforming mortgage market tries to stand on its own. If rates skyrocket(unlikely) expect FED action as a stable housing market is a distinct policy of the Obama Administration and the too big to fail banks. The TBTF are sitting on north of 4m homes that they will need to short sale or foreclose on this year per various estimates being thrown around the industry.

FED Assets

The fundamentals driving the jumbo mortgage rates (i.e., 10-year Treasury yields and the spread between MBS and Treasury yields that investors demand in order to compensate them for the prepayment risk of mortgage-backed securities) suggest that we are very unlikely to see rates go lower than they are now. Treasury yields are quite low from a historical perspective, and spreads are about as tight as they have ever been.

One other interesting fact that shows up in the first chart is that the difference between jumbo and conforming mortgage rates is still quite large given that a conforming 30Y fixed is at 4.75% currently. That means that even if conforming rates move higher, it will likely take awhile before jumbo rates move much higher; the spread between them could compress by another 25-50 bps for the absolute Super Prime Credits with 30-40% equity and substantial investment assets. aka Money Good Credits.

However, I should also point out that the declining spread between jumbo and conforming loan rates is a very good sign that private capital is returning to the jumbo mortgage market in general. The Fed is only buying conforming mortgages, not jumbos, so jumbos have been outperforming conforming MBS, which in turn suggests that private capital has been actively seeking out the higher yields on jumbos. That is also an indication that when the Fed stops buying MBS at the end of March, there is no reason to expect jumbo mortgage rates to move significantly higher. A lot of pressure is building because of the RECORD default rate of 9.6% which prevents investors such as pension funds, insurance companies and mutual funds from aggressively buying jumbo mortgage bonds. These twin forces lead us to believe we will see rates in the 5.75-6.50% range on the 30Y Fixed Jumbo Loan throughout the year.

We continue to believe that prospective homebuyers and most long term homeowners would be well-served to choose a 30-year fixed jumbo mortgage instead of an adjustable rate. But, one size fits all advice never works as you well know.  Fixed rates are very low from a historical perspective, while the short-term rates that drive ARMs are very likely to rise significantly in coming years. With the fixed rate you get the certainty of locking in a historically low jumbo loan rate, but with adjustable rates you are exposed to considerable uncertainty down the road, because no one knows today how high short-term rates will be in the future. We always advise matching the loan term with personal and financial plans.

Have a prosperous day.

Saturday, February 20, 2010

Energy Miracle Needed STAT

In his speech, Bill Gates touts TerraPower reactors that can be fueled by nuclear waste as one possible solution. Is nuclear power the answer? I don't know, but at the very least Gates should be applauded for highlighting the need for immediate innovation in the energy sector. The value of having someone of Gates's stature talk about getting to net zero CO2 can't be overstated. What do you think?

Sunday, February 14, 2010

Luxury Homeowners Default at Record Rate

Cross posted on

Retail sales came out basically flat, car sales have stabilized(aside from Toyota) and job losses seem to be slowing down. But this long running recession is not finished with exacting pain on jumbo mortgage borrowers.

A record 9.6% of homeowners with a jumbo mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with previously stellar credit records and six figure incomes. And the wave of foreclosures isn't expected to crest until the end of next year as the walk aways from 2004-7 purchases work their way along the lengthy foreclosure process which had been delayed by various state and federal foreclosure moratoriums.

The seriously late payment rate on prime jumbo loans has doubled from this time last year, and now represents the largest share of new foreclosures. U.S. prime jumbo mortgages backing securities at least 60 days late rose to 9.6 percent in January from 9.2 percent in December, the 32nd straight increase for “serious delinquencies,” according to Fitch Ratings.

The worst of the trouble continues to be centered in California, Nevada, Arizona , Florida; recently Oregon and Washington State have been added to the list of hard hit markets. These states account for 46 percent of new foreclosures in the country. There were no signs of improvement. The pain, however, is spreading throughout the country as mid-level and high end job losses take their toll. Aside from job losses lost bonus income and pay cuts were cited by borrowers as factors in their inability to stay current on their jumbo mortgage payments.

With continued economic weakness and property values in most cities declining we highly recommend our fix it and forget it strategy. Lock in a jumbo loan term that meets your specific personal and financial goals. We tend to favor the 7/1 ARM Jumbo Mortgage at 4.50% or the fixed jumbo loan at 5.625% with a 30Y term. These represent an excellent value considering that in three decades we haven’t had jumbo mortgage rates lower than these levels. As always, make it a prosperous week.