Jumbo mortgages are those loans that are too large for government assistance through Fannie Mae, Freddie Mac and the FHA which is available for mortgages that don’t exceed $417,000 and $729,750 in more expensive areas of the country. After the financial crisis hit, the jumbo mortgage market basically froze and came to a halt. With the absence of a secondary market and housing prices continuing to drop, lenders had to keep these existing jumbo mortgages on their balance sheets and became unwilling to add any additional risky, jumbo loans to their portfolio which left high end buyers locked out of the market. It literally crippled the jumbo mortgage market for high end home purchases and refinances.

As banks have begun to recover and have more capital on hand, they are now more willing to return to the jumbo mortgage market, although at a cautious pace since the secondary market has not yet returned. As the jumbo mortgage market tends to be more varied, so do the interest rates and terms vary widely. All of this is great news for upscale home shoppers, those who want to refinance and those who want to upgrade to larger homes.

Although the banks are beginning to lend and jumbo mortgage rates are at record lows, lenders are still being very cautious and using tight standards for qualifying. Those applying will need to fully document income and assets for the past several years. Although required credit scores will vary, the average score needs to be at least 720. As far as debt ratios are concerned, monthly mortgage payments must require no more than 36% to 38% of pretax income. Debt payments, including auto loans and credit card payments, cannot take up more than 41% of pretax income. For purchases, the down payment depends on the amount of the loan with some as low as 20% and some as high as 40% down payment.

For anyone who qualifies, the current jumbo mortgage rates are very competitive. Borrowers who are shopping for an adjustable rate can choose from the 5/1 ARM at 3.625%, 7/1 ARM at 4.50% and the 10/1 ARM at 4.90%. For a fixed rate jumbo mortgage, the 15 year fixed is 4.50% and the 30 year fixed is 5.125%. Since these rates vary from lender to lender, borrowers need to shop around. While the short term borrower may opt for the adjustable rate mortgage, the long term borrower might find the fixed rate more attractive since rates are so low and have no where to go but up. The rate spread between the conforming mortgage and the jumbo mortgage has narrowed down to less than a percentage point.

With no secondary market, the jumbo market has not yet completely melted. With jumbo mortgage rates at record lows and the jumbo market thawing, it is wise to remember that it is limited to the amount that the banks are willing and able to keep on their own balance sheets until the return of private outside funding.

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:

Jumbo Mortgage Rates
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.

Now, the folks who phave the several hundred billion dollars of jumbo loan mortgages outstanding in the country should be checking in with us because the jumbo mortgage rates available are the lowest in history following all the negative news forcing money into the safety and security of SOLID mortgage paper. The average rate on a jumbo 5/1 ARM which was the hot product in the real estate boom has a national average rate of 5.25% and the average 30Y fixed jumbo mortgage is at 6.25%. This is the average rates from the last Corelogic report of the jumbo loans outstanding.

Today a well qualified client with 20%+ equity,a 720 FICO or better, owing $1m on a primary residence could lock in the following jumbo loan rates in the majority of states:
5/1 ARM    3.80%
7/1 ARM   4.55%
10/1 ARM 4.90%
15Y Fixed 4.375%
30Y Fixed 5.25%

With a bit more equity and a higher FICO score these jumbo loan rates are even lower. I think people need to get crazy excited about the savings and lock in the lowest jumbo mortgage rates we have ever seen. Most people refinancing are saving 1-2 thousand dollars a month because they are dropping their interest rates over 1%. 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.

1. In an era where house prices rise reliably (which was 1963 to 2007), it was almost impossible to overpay for a house. It was an efficient market, and rising prices cover many mistakes. Investing in houses in the USA was a no-brainer. More leverage and more at stake just paid off more in the end. In 2006 many subprime and ALT-A lenders would allow nothing down up to a 1m jumbo loan with a 720 FICO score. Needless to say these loans defaulted at a 40%+ rate as people walked away when values dropped. The old mantra of buying as much house as possible with as little down payment as you could doesn’t work if values fall in the future.
2. A house is not just an investment, it’s a place to live. This is the only significant financial investment that has two functions.
3. The psychology of down markets is irrational. Rising house prices might be efficient (many bidders for a single item lead to higher prices), but when there aren’t so many bidders, irrational sellers (see #2) don’t lower their prices accordingly. So, inventories get longer and it’s easy for the prospective buyer to think that a certain price is the ‘right’ price because so many people are offering houses at that price. Just because someone offers a price, though, doesn’t mean it’s fair in a given market.
4. Along the same lines, anchoring has a huge impact on housing prices. If someone offers a house for $1.7m and you think it’s worth $1.2m, you don’t offer that. No, of course not. The price is a mental and emotional anchor, and you’re likely to offer far more because you are falling in love with a view, a certain floor plan or a special neighborhood.
5. The social power of a luxury home is huge. When you buy a luxury home or a country estate, you are making a statement to your in-laws, your family, your neighbors and your business/social contacts. Nothing wrong with that, but the question you must ask yourself is, “how big a statement can I afford?” How much are you willing to spend on personal marketing and temporary self-esteem? This is a big social pressure faced by newly-wed couples, lawyers and doctors as they come out of school landing that deep six figure position.
6. If buying a bigger house (or even a house with an extra living room or a 4 car garage) is going to keep you in stuck in the office 90 hours a week till the end of time, is it really worth it?
7. By the time you buy a house, you probably have a family or have plans to bring some little owns into your life. Which means that this is a joint decision, a group decision, a decision made under stress by at least two people, probably people that don’t have a lot of practice talking rationally about significant financial decisions that also have emotional and social underpinnings.
8. If you have a steady career, matching your mortgage to your income isn’t dumb. Given the recent environment with bonus money being cut and profit sharing taking a dip having a jumbo mortgage payment that is less than ¼ to 1/3 of take home pay can bring about a lot of piece of mind.
9. Real estate brokers, by law, work for the seller (unless otherwise noted). And yet buyers often try to please the broker. You’ll never see her again, don’t worry about it. [Let me be really clear about what I wrote here, just in case you’d like to misinterpret it: When a prospect sees an ad or goes to an open house, she is about to interact with a broker. That broker, in almost every case, is hired by the seller and has a fiduciary responsibility to the seller to get the very best price for the house. There are exceptions, like buyer’s brokers, but those brokers, as I said, note that they are representing the buyer–how can you represent someone without telling them? Many brokers like to pretend to themselves that they are representing both sides, and while that’s a nice concept, that’s not the law.
10. You’re probably not going to be able to flip your house in two years for a big profit. Maybe not even ten years. So revisit #2 and imagine that there is no financial investment, just a house you love. And spend accordingly.

I’m optimistic about the power of a house to change your finances, increase your net worth, to provide a foundation for a family and our communities. I’m just not sure you should buy more house than you can COMFORTABLY afford merely because houses have such good marketing.

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.

We think home owners that are floating against the LIBOR indexes without a plan to sell soon or get another ARM or better yet a fixed jumbo loan are living without interest rate insurance. I am a firm believer in having full coverage auto insurance given the cost of coverage vs the financial risk of an accident. They are just waiting for a financial accident when they get the new rate increase notice. Most ARMs adjust every six months with a 30-60 day notice of the new interest rate and payment. The jumbo loan rate trend has only been down for the last few years as the world almost fell off a cliff during the 07-08 meltdown. I think with the economic recovery gaining speed that it is only prudent to get some jumbo mortgage interest rate insurance and lock the lowest rates in history. Avoid an interest rate increase that for millions would come as a nasty surprise. 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.

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.

Put your seat belt on and sit back while I give you the tour of the national mortgage landscape and the forces that will continue to force home prices down in most markets.

First on our tour is FHA.

Did you know that FHA(taxpayer backed) lending represented 30% of purchases in 2009? Let’s see how those loans have been doing:

Shocking, less than a year after signing the papers, 15% of the 2008 loans are 60 days or more late. If this was a bank they would have been out of business two years ago. But, FHA isn’t a bank, it’s backed by the explicit promise of the US taxpayer.

The second bump in the road is the near term future of property values.

Think lots of foreclosures have already sold in your area, and it will be stable from here on out?
I wish I had better news for you but the next wave of homes hitting the market will be a Tsunami. The new strategy (NYT Link) coming out of Wall St/Washington is to use short sales to sell the homes currently occupied by folks who can’t refinance, get a loan modification or sell in a traditional manner because they are upside down. Remember the estimates are that roughly a third of homes with a mortgage are worth less than the balance owed. The expectation is that hundreds of thousands of home owners will take the free taxpayer money to move out early before their foreclosure clock ticks down forcing a visit from the local sherrif.

The third looming pothole on our road to recovery is the hundreds of billions in mortgage loans set to reset either to fully amortized or a floating rate from an interest only or negative amortization payment.

Chart from Credit Suisse Research.

This is going to be a bumpy ride. This works out to 100-200k homeowners a month in 2010. This increases to 300-400k homeowners a month in 2012 experiencing a reset on their adjustable rate mortgage. The option ARMs are the most toxic as these homeowners have been paying less than the interest only payment and will be forced to pay principal. These loans are concentrated in AZ, CA, NV, FL and a few other former bubble markets. Option ARMs are defaulting at the highest rate of any loan product.
The national landscape and the actions of millions of others matters to the prudent homeowner who are on time with their mortgage and waiting to refinance their jumbo loan when they are back from the big summer vacation or things settle down at the office.

The biggest factor now in jumbo mortgage lending with the epic defaults facing government agencies and banks is EQUITY. An 800 FICO and a stable income matter but a bank doesn’t want the risk on the books of a home owner with no equity. The current walk-away rate of someone with no equity is over 20% when someone owes 10% more than their home is worth.

Don’t wait till mortgage rates begin to move up or some special date on your to-do list. Your equity, good credit and solid income will allow you to lock in a great jumbo mortgage rate and ride out this foreclosure tsunami washing over our great nation. Explore your refinance options now and be a prudent informed homeowner. As always, have a prosperous day.

Mar. 5, 2010 — (FreeRateUpdate.com) – 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).

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.

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.

Once a person has little to no equity their odds of walking away/defaulting in the event of an income cut or job loss quadruples vs a homeowner with a large equity cushion. In a distressed housing and lending environment the equity cushion benefits the bank and the borrower because in a distressed situation the homeowner could sell the home before any serious delinquency issues develop.

The strict equity requirements will remain in place for at least 1-2 years in our opinion and could actually increase depending on how values hold up in the 1-4m dollar luxury home segment during the spring and summer. The overall view of various risk analytics companies such as S&P, Moody’s and the Loan Performance Group of Corelogic  is that high-end property values will continue to decline nationally especially within the states with were formal bubble markets and areas with high unemployment rates.

We have left the era of low unemployment, steady bonus increases, stable home values and are in an era of personal financial risk that most homeowners have never seen before. We strongly encourage homeowners that are wanting/needing to refinance their jumbo loan in the next few years to consider their personal and individual housing market risks as the most important factors and make this a financial priority this year.

You can read the entire piece via the S&P website, but I’ll save you some time and give you the summary:

We believe that the recent constriction in the supply of foreclosed homes on the market is a temporary one. Loan modifications and the observed extension of time distressed loans remained as such may simply have delayed the inevitable, creating the demonstrated shadow inventory of troubled loans. Ultimately, the majority of the properties these distressed loans represent will likely have to be liquidated.

Our estimate of $473.4 billion in loans that will eventually need to be liquidated corresponds to approximately 1.75 million individual properties. This number represents almost 50% of the existing homes available for sale as of December 2009

Moreover [this] only accounts for expected defaults for mortgages outstanding in the private securitization market (which makes up less than a third of the total securitization market and less than 5% of the total mortgage market).

While we do not expect all of these distressed properties to liquidate at the same time, the significant percentage of the current supply that these distressed loans represent does reveal the potential future increase in housing supply. An influx of liquidated properties is likely to prompt a decline in prices if unaccompanied by a comparable increase in demand.