Maureen Megowan's Blog

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Jumbo Loan Market Improving

In an article in today's Los Angeles Times, it was reported that the Jumbo Loan Market has significantly improved over the last several months. Some of the quotes from that article are as follows:

"Two weeks ago, the average interest rate on 30-year fixed-rate jumbos dropped to 5.79%, a nearly five-year low, according to rate tracker Informa Research Services of Calabasas. It edged up to 5.88% on Tuesday, still very attractive by historical standards. The average is down from well above 7% in late 2008."

"The lower rates and somewhat easier terms reflect newfound confidence among banks in the housing market. That's because, by definition, jumbos are too big to be bought by Freddie Mac and Fannie Mae or to be insured by the Federal Housing Administration. Plus, the private market for mortgage-backed bonds dried up when the meltdown hit. So lenders making jumbo loans these days must be willing to take the risk of keeping them in their portfolios.



The maximum amounts for Freddie Mac and Fannie Mae "conforming" mortgages, and for FHA mortgages, are set by Congress. The cutoff for single-family homes was $417,000 from 2006 until February 2008, when lawmakers increased it temporarily to $729,750 in certain high-cost areas, including Los Angeles, Orange and Ventura counties."

"The increased upper limits, which have been extended until the end of this year, have created a three-tier system in expensive areas, mortgage professionals say: loans of up to $417,000, which are the easiest to obtain and carry the lowest rates; "conforming jumbos" from $417,000 to $729,750, which are somewhat harder to get and have slightly higher rates; and true jumbos, with the toughest standards and highest rates.

In the boom years of 2005 and 2006, interest rates were typically no more than a quarter of a percentage point higher on jumbo loans than on conforming loans, according to Informa Research. That widened as the mortgage meltdown intensified and home prices dropped in late 2007. The spread ballooned to nearly 1.7 percentage points in early 2009 after the entire credit system froze.

But this year the rate spread has narrowed to less than a percentage point. It could shrink more if conforming-loan rates rise as expected after the Federal Reserve wraps up a $1-trillion-plus program to support the market for conforming loans next month."

In addition to lower rates, down-payment requirements are being relaxed in some cases. For example, to write a jumbo loan in coastal areas of Los Angeles and Orange counties, Wells Fargo Home Mortgage looks for a 20% down payment or that percentage of equity, down from 25% last year, said Brad Blackwell, a national mortgage sales manager at the lender.The reason: Wells believes high-end home prices are stabilizing in those coastal counties."

":Jumbo loans remain much harder to get than before the credit crunch and recession. Borrowers typically must have a credit score of at least 700, compared with boom-era minimums in the 600s. What's more, unless their down payments are very large, borrowers must provide evidence of high income, have sizable bank accounts as a cushion against the unforeseen and occupy the houses themselves.

But there are clear signs that the jumbo market has loosened. One is an increasing availability of "stated income" loans -- those that don't require proof of income -- of as much as $2 million to borrowers with at least a 40% down payment, said mortgage broker Gary Bluman, owner of Real Estate Resources in Brentwood."

"Although no jumbos have been turned into securities for at least two years, packages of delinquent jumbos have begun to be sold again to "vulture" investors, a sign that the secondary market for the loans may revive, said Michael Fratantoni, vice president of research at the Mortgage Bankers Assn.

"The ice sheet," he said, "is starting to crack here and there."

 

This is excellent news for all home buyers.  The public securities market for mortgage backed securities is a vital component of the mortgage financing system, and it is critical that this market revive to take the place of the massive amounts of government financing of the mortgage markets that have been taking place over the last year or so. I believe that once the government stops subsidizing interest rates for conforming loans, that interest rates for these loans will rise at least a half of a percentage point to re-establish its normal one-quarter of a percentage point spread under jumbo mortgages.

For more information about Palos Verdes and South Bay Real Estate and buying and selling a home on the Palos Verdes Peninsula, visit my website at http://www.maureenmegowan.com . I try to make this the best real estate web blog in the South Bay Los Angeles and the Palos Verdes Peninsula. I would love to hear your comments or suggestions.

Comment balloon 2 commentsMaureen Megowan • February 24 2010 05:22PM

Comments

Useful article - thanks Maureen. Up here in the San Francisco Bay Area we also watch the jumbo loan rates pretty carefully! I'm advising my clients to lock in anything they can get around the 5.75% mark. For a self-employed loan you need to have been self-employed for 2 years min. I now have a coupe of lenders who will do self-employed jumbos. But for self-employed in general they want to see 2 years of tax returns which show you actually had some income left after all those self-employed expense deductions...

Posted by Tony Lacy Thompson, The Mortgage Guy for Sunnyvale & Cupertino (Arcus Lending) over 8 years ago

Maureen, This is my market in Naples and I am listing carefully.  Glad to see some confidence come back in this area. 

Posted by Marcia Hawken, Naples Luxury Specialist (Downing-Frye Realty, Inc.) over 8 years ago

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