jumbo mortgage loans are being actively funded by remembering the lending philosophy we relied on before the risk could be passed onto some unsuspecting pension fund via a CDO created by a trader at a Wall St Bank. With trillions in mortgage loan losses across the nation, major changes were needed. Regulatory reform passed Congress last week, but it wasn’t hard for the jumbo mortgage market to fix our own problems.
Normalcy has returned. The jumbo loan environment has settled into a prove it, we double verify it, and we fund it environment for well qualified borrowers. The recent national statistics show about 14% loans with a principal balance of 1m+ are at least 60 days late. This is up sharply in the last six months from the 9.78% figure that we ended 2009. Hopefully these default figures will flatten out and fall as the better jumbo loans of 09-10 perform much better than the loans closed in 04-08.
Against this backdrop jumbo loans are being funded only on a portfolio basis (Wall ST jumbo loan packaging is dead) to solid clients under the philosophy that the borrower and the amount of equity in the property should have an ample margin for the known/unknown risks a borrower/lender may face down the road. With regulators, taxpayers, shareholders and all stakeholders demanding sound lending the industry has delivered. I believe this only benefits the luxury market although it pushes out the marginal borrower and may result in some property value declines as the available buyers have thinned out a bit.
Sound lending has returned and borrowers are being ‘rewarded’ for their financial strength and prudence. Remember it’s a ‘prove it’ to us world now.
First and foremost, lenders are pulling copies of your tax returns directly from Uncle Sam. The idea here is to make sure that you haven't altered the copy of your last two years' tax returns that you provided when you signed your loan application. Lenders want to know if you might have exaggerated how much you earned.
Lenders also are going to great lengths to verify employment and liquid assets. We are seeking confirmation in writing from your H.R. department about what you earn, your position and how long you've worked there.
It's the same for your bank or brokerage accounts. Rather than being satisfied solely with the copies of the statements you provided, lenders are going directly to your financial services company to secure another set of those statements to make sure the numbers line up or that you just lost 200k betting that the latest iPhone signal problem would crush Apple’s stock price.
Lenders are no longer taking the appraiser's word for how much the property you want to buy or refinance is worth, either. Now, we are employing automated valuation models as well as an additional appraisal from a separate vendor to be certain the value estimate is on the money. This is especially true in highly distress markets or for very unique custom homes. After all, the bank is ‘buying’ the home and the borrower is signing to pay it back over 15-30 years.
Next in the line of close scrutiny is your credit score, but not just the score pulled when you applied for the loan. Now, our industry is pulling a second score shortly before closing to make sure that you haven't taken out a luxury car lease/loan, bought a houseful of furniture on credit or done something else that might change your ability to make your house payments.
Having passed all these double checks, a well qualified client with 20%+ equity, a 740 FICO or better, borrowing $1m on a primary residence could lock in the following jumbo loan rates in the majority of states:
5/1 ARM 3.625%
7/1 ARM 4.50%
10/1 ARM 4.90%
15Y Fixed 4.50%
30Y Fixed 5.125%
With a bit more equity and a higher FICO score these jumbo loan rates are even lower. I think people need to strongly consider locking in the lowest fixed jumbo mortgage rates we have ever seen. Most client’s refinancing are saving 1-2 thousand dollars a month because they are dropping their interest rates over 1%. The majority of jumbo mortgage loans funded over the last quarter were 30Y fixed. Maybe running with the herd is right once in awhile. The latest chart should really demonstrate how much money is on sale for SOLID borrowers.
And above all please get a jumbo loan that makes sense for your short and long term financial plans. As always, have a prosperous day.