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.