Lower Rates, While Great, Do Little For Jumbo Lending

The Realty Times article reflects the positive effects of lower interest rates on mortgage originations and home purchases, but fails to note the failure of said rates to transcend the conforming/conventional markets into the jumbo markets.  The implications of this failure are that many homeowners in the higher cost states (CA, NY, MA, etc.) still cannot get competitive financing; thus, driving home prices down further.

 

As a mortgage originator, I could not be more ecstatic about lower rates...unless that is they go down further!  Applications for refi's have jumped, as well as for purchases.  This is all great news for the mortgage and real estate sales' industries: we are seeing higher applications and what appears to be a small upward trend in home sales.  While I am of the opinion that this is a W-shaped recovery (see other analysis under my name) and that we have further declines in real estate sales and values, I am encouraged by the lower rates and increased applications. 

 

I am concerned, however, that we are not seeing the lower rates translate into more sales activities in the jumbo markets and that many existing jumbo borrowers will be faced with impossibly high rates if/when they must refi.  Inevitably, the much higher rates on jumbo products will drive down the values in many parts of our nation; namely the blue states and other areas which have their jumbo limits set too low.

 

The rates for jumbo products are in the high 6's and low 7's versus the conventional markets where the rates are in the high 4's and low 5's!  Three months ago, we saw about a 1.5 point spread.  As you can see, we are going the wrong direction for jumbo lending. 

 

What is "jumbo"?  There are essentially three tiers of loans: Tier 1) Conforming, $417k and below, tier 2) Agency Conforming, above $417k up to the county limit, and tier 3) anything above the county limit.  Here lies the problem:

 

The jumbo limits are set too low and the jumbo markets encapsulate too large a percentage of too significant a population to ignore.  In other words, a huge percentage of homeowners have jumbo loans based on the limits set for their respective counties.  Thus, we have many homeowners who cannot afford to refi when their existing loans recast (all ARM's including Option-ARM's).  To keep their payments low, many of these borrowers used hybrids with interest-only payments and Option-ARM 's.  If a borrower was forced to refi a  5.5%,  interest-only, 5/1 ARM, their new rates would jump 1 to 11/2 percent, fully amortized.  The recasted payment will shoot through the roof, putting economic distress on the homeowner! 

 

While I applaud lower rates, we need to raise the minimum limits for jumbo to allow the middle + class borrowers to safely exit their existing loans and to allow new buyers to enter the jumbo markets.  Otherwise, many homeowners will be forced to walk away from their homes and new borrowers will be dissuaded from buying new homes requiring jumbo loans.  You know the cycle from here.

 

With regard to the jumbo purchase markets, anecdotal evidence suggests that if people cannot afford the higher payments that come along with jumbo borrowing, they will either buy for less or buy less.  Obviously, buyers are trying the former before the latter.  Seller's are not in the driver's seat.  Thus, we are seeing people lowering sale's prices to move their properties.  If not, we are seeing such stringent underwriting at the jumbo level that very few borrowers are qualifying for jumbo loans and, if they do qualify, they are often not willing to pay such a large premium for the right of borrowing jumbo.  In either case, the pressure is downward for "luxury" home prices.  The other alternative, of course, is to not buy the "luxury" house on the hill and settle for the basic home on the street.  The problem is that in places like Los Angeles, San Francisco, Boston, NYC, etc., a huge percentage of "basic" homes fall under the jumbo pricing category, not conventional.

 

We simply have too many jumbo areas that need lower interest rates soften the blow of recasts, unemployment, and the resulting increases in  foreclosures/short-sales.  Until then the increase in loan applications and purchasing will be limited to the red states and to the lower economic strata of the blue states.