Thursday, March 25, 2010

Jumbo Loans: Post Steroid Lending Era

Cross-Posted with The source for mortgage rate news.

The value of luxury homes has been declining for 3-4 years now depending on the particular city. We won’t go into specific markets here as that is better explained on a granular level by the Case-Shiller Research and individual neighborhood analysis of 750k-4m luxury homes by your local luxury realtor. Above 4m is rarified air and is declining but has much different dynamics such as what the NFL/NBA/MLB contracts will look like in 2012 and if the hedge fund industry will continue to pay the large performance bonus numbers of the recent past. You get the idea.

Luxury home prices shouldn’t be declining some could say because:
  • Financial markets the world over have recovered nicely from the March 2009 lows.
  • Unemployment is running less than 4% for seasoned, highly skilled, well educated professionals (doctors, engineers, lawyers, etc). The rest of the working economy is running north of 10% unemployment if you believe the official stats.
  • Jumbo loan borrowers didn’t do the crazy exotic financing that imploded in subprime and pay option ARMs weren’t very common in the 1-4m market.
I agree in theory but what is often misunderstood by jumbo mortgage borrowers is the crazy lending that was done during the bubble years of the last decade that pushed values up almost daily. They don’t know the huge impact on luxury home prices of removing the steroid juiced lending of Bear Stearns, Lehman et al. The thousands of banks/brokers that sold their ultimately toxic/destructive jumbo loan programs that ended up in bundled securities that investors curse the day they bought.

Everybody knows we have had massive government bailouts and are in a recession. But they didn’t know that their home was appreciating rapidly during the bubble because everything was being bid up in their neighborhood, city and nationally with juiced money from casino like investment banks. Most clients I speak to thought their neighbors had better paying careers or had been better investors/savers. No, they were outbidding and buying on the juice of Wall St casino money. Also the move up buyers with equity in their starter home that are ready to buy in the gated community are on the endangered species list in most cities.

With the steroids that powered crazy out of your mind lending removed, the puffed up and totally juiced real estate market of 10-30% annual price gains in some markets is gone and never to return. Hopefully. The inventory of homes for sale priced at $750,000 to $1 million is now 20 months, vs. 11 months for homes in the $100,000 to $250,000 range, the National Association of Realtors reports. With all these forces at work the body of luxury real estate is shrinking back to normal based on the fundamentals of ability to pay and put a healthy down payment of hard earned money into a home purchase.

Did you know that at the height of the insanity most people could borrower a million dollars with a strong FICO score and a reasonably believable stated income?  No money down and little document verification! Those are the luxury foreclosures that litter Florida, Arizona, Nevada, California etc.

The return to sanity with the jumbo loan lending of the banks and credit unions left standing has resulted in substantial equity requirements, fully documented income, a verified chunk of savings/investment assets and a requirement of 1-2 full appraisal reports of what the home is worth now based on sales of similar properties in the last 30-60 days.

I feel for the luxury homeowners that have “…lost hundreds of thousands of my equity.” But the money wasn’t real unless they cashed it out at the top via a refinance/HELOC or a sale. The casino lending is gone and hopefully won’t return again. The most critical element in getting the best and most competitive jumbo mortgage rate is EQUITY.

My crystal ball is in for repair so don’t be mad if I am not perfectly correct on this prediction but we believe that jumbo loan rates will be higher within the next year and luxury home values will continue to slowly decline in most cities across the country as the effect of steroid lending wears off and return to the stability of real local economic fundamentals. If you need to refinance your jumbo mortgage within the next few years it’s prudent to explore your jumbo loan options now. As always, have a prosperous day.

Friday, March 5, 2010

Jumbo Mortgage Borrowers:Avoiding Mistakes of the Past

Cross-Posted with

Over the years, I have had countless conversations with home buyers about their jumbo mortgages. From 2003 to 2008, a typical a cocktail party or a BBQ invariably went something like this:

Home-Buyer: We got a great deal on our new mortgage.
Me: Did you do a 30 year fixed jumbo loan or something more exotic?
HB: 30 year fixed jumbo mortgage— at 4.5% !
Me:  Sorry, but that’s not 30 year fixed — rates are 6.5% today. That’s probably a 2/28, with a reset in 200X.
HB: No, we definitely asked for a 30 year fixed.
Me:  Well, that’s not what you got — its impossible to get that loan at that rate today.
HB: We’re good negotiators.
Me: Jumbo Mortgage rates are set by the bond market. Banks charge a mark up ABOVE the rates that they can borrow money. They can’t get 30 year money at 4.5%, so you can’t get 4.5%.  There is only so much negotiating you can do with the bond market.
HB: Well, its definitely a 30 year fixed.
Me: Please make the pain stop . . .

And so on.

Huge swaths of people, did not understand what they were buying, what it cost them, what their other options were, whether they could afford it or not.

I am not saying this to exonerate their ignorance — it is inexcusable in my opinion. Adults must take responsibility for their decision making, regardless of how foolish it may have been. That home buyers cannot figure out a basic financing document is beyond my comprehension. However, that is the way it is. We must acknowledge the simple reality, if we wish to avoid this problem in the future. That’s why we need to insure consumers understand what they are purchasing.

We are happy to see clients take a serious look at their current loan and the pros/cons of their various jumbo loan ARM refinance options vs the certainty of a refinance into a fixed jumbo mortgage. I think this a great change from the days of simply selecting the “cheapest” option of “no-points, no fees” on a jumbo 5/1 Interest Only ARM. Home owners realize their risks and are trying to make the most informed decision possible.  The prudent behavior by lenders and borrowers will result in much better jumbo loan performance and better lending standards in the future.

Now for the meat and potatos of jumbo mortgage rates this week. The trend was largely sideways action for products that aren’t deposit based. Our portfolio products dropped by .125-.25% across the product spectrum  for money good credits. Here is a sampling

30Y Fixed Jumbo Mortgage 5.625% paying 1 discount point

7Y ARM Jumbo Loan 4.50% paying 1 discount point

*In order to help customers compare similar jumbo loans, we use the following parameters in conducting our rate survey: A jumbo loan amount of $1m, sales price $1.3m. Each loan is a purchase transaction, 720 credit score, 30 day rate lock, taxes and insurance being escrowed, single family primary residence with fully documented income and verified assets(savings/investments).