0 Jumbo Mortgage Borrowers:Avoiding Mistakes of the Past

Cross-Posted with www.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).

Detail: Jumbo Mortgage Borrowers:Avoiding Mistakes of the Past

0 Fixed Jumbo Mortgage Rates at Historic Lows

Cross post.

Los Angeles Feb 24th (Freerateupdate.com)

Warning: A little technical.This is the Whole Wheat 8 Grain Variety of our ongoing commentary on the jumbo mortgage market.







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.

Detail: Fixed Jumbo Mortgage Rates at Historic Lows

0 Luxury Homeowners Default at Record Rate

Cross posted on www.FreeRateUpdate.com

Retail sales came out basically flat, car sales have stabilized(aside from Toyota) and job losses seem to be slowing down. But this long running recession is not finished with exacting pain on jumbo mortgage borrowers.

A record 9.6% of homeowners with a jumbo mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with previously stellar credit records and six figure incomes. And the wave of foreclosures isn't expected to crest until the end of next year as the walk aways from 2004-7 purchases work their way along the lengthy foreclosure process which had been delayed by various state and federal foreclosure moratoriums.

The seriously late payment rate on prime jumbo loans has doubled from this time last year, and now represents the largest share of new foreclosures. U.S. prime jumbo mortgages backing securities at least 60 days late rose to 9.6 percent in January from 9.2 percent in December, the 32nd straight increase for “serious delinquencies,” according to Fitch Ratings.

The worst of the trouble continues to be centered in California, Nevada, Arizona , Florida; recently Oregon and Washington State have been added to the list of hard hit markets. These states account for 46 percent of new foreclosures in the country. There were no signs of improvement. The pain, however, is spreading throughout the country as mid-level and high end job losses take their toll. Aside from job losses lost bonus income and pay cuts were cited by borrowers as factors in their inability to stay current on their jumbo mortgage payments.

With continued economic weakness and property values in most cities declining we highly recommend our fix it and forget it strategy. Lock in a jumbo loan term that meets your specific personal and financial goals. We tend to favor the 7/1 ARM Jumbo Mortgage at 4.50% or the fixed jumbo loan at 5.625% with a 30Y term. These represent an excellent value considering that in three decades we haven’t had jumbo mortgage rates lower than these levels. As always, make it a prosperous week.

Detail: Luxury Homeowners Default at Record Rate

0 FDIC Warns Banks to Expect 2-3% Rate Increase

Homeowners waiting for "the right time" to refinance/purchase should move up the timeline rapidly. The FDIC, Federal Reserve and other federal bank/credit union regulatory agencies are warning the banking industry today to prepare for an increase in rates from 2-4% over the next 1-2 years.This is a serious wake up call to people considering refinancing or purchasing a new home, especially for jumbo loan borrowers. The greatest increase would be immediately seen in fixed jumbo mortgage products such as the 30Y and 15Y fixed jumbo loans which have become the loan structure of choice over the last year.

Given the historical fixed mortgage rate, dire fiscal position of the US Government forcing the US Treasury to borrower roughly 1.5 Trillion in 2010 and the recent warnings from various regulatory agencies; we firmly believe 2010 may offer the best fixed jumbo mortgage  refinance opportuntity homeowners are likely to see over the next decade. For those purchasing a home this year strongly consider going with a fixed rate mortgage. Obviously, financial advice isn't one size fits all but you can always error on the side of caution and lock in some of the best fixed mortgage rates in history.

Detail: FDIC Warns Banks to Expect 2-3% Rate Increase

0 Fix it & Forget It!

Grandma's miracle product for her dentures should lend their slogan to Fannie Mae and Freddie Mac. Today's announcement from the Mortgage Bankers Association that 90%+ percent of loan applicants are applying for fixed mortgage rates on refinances and purchases has renewed my faith that people get it! These rates are unreal and can't last. NOTE:CLICK CHARTS FOR FULL SCREEN.

www.thegreatloan.com

Boring Mortgage Banker Talk Below:

Wed, 2009-12-23 10:39 — NationalMortgag...

The Mortgage Bankers Association (MBA) has released its Weekly Mortgage Applications Survey for the week ending Dec. 18, 2009. The Market Composite Index, a measure of mortgage loan application volume decreased 10.7 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 10.9 percent compared with the previous week.
 The Refinance Index decreased 10.1 percent from the previous week and the seasonally adjusted Purchase Index decreased 11.6 percent from one week earlier. The unadjusted Purchase Index decreased 13.4 percent compared with the previous week and was 32.7 percent lower than the same week one year ago.

The four week moving average for the seasonally adjusted Market Index is down 0.2 percent. The four week moving average is down 1.0 percent for the seasonally adjusted Purchase Index, while this average is up 0.6 percent for the Refinance Index.

The refinance share of mortgage activity increased to 75.9 percent of total applications from 75.2 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 3.8 percent from 4.1 percent of total applications the previous week. The average contract interest rate for 30-year fixed-rate mortgages remained flat at 4.92 percent, with points increasing to 1.23 from 1.08 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.34 percent from 4.33 percent, with points increasing to 1.03 from 0.91 (including the origination fee) for 80 percent LTV loans.

The average contract interest rate for one-year ARMs remained flat at 6.52 percent, with points remaining unchanged at 0.39 (including the origination fee) for 80 percent LTV loans.

For more information, visit www.mortgagebankers.org.

Detail: Fix it & Forget It!

0 Why can't I get a 5% 30Y Fixed Jumbo?

The Current Recession/Depression Impacts All Borrowers

Jumbo mortgages, typically loan amounts above $417,000, are defaulting at a rapid pace as the economic crisis affects borrowers at all income levels. Bloomberg is reporting that jumbo mortgages, typically associated with higher income home owners, are becoming the next black hole for the banking and housing industry echoing concerns we have seen in our segment of the 1m+ jumbo market.

(Bloomberg) — Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest. About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. They got to that level within 10 months, almost twice as quickly as 2007 borrowers and the fastest rate since at least 1992, when LPS Applied Analytics began tracking the market.

The jump in late payments on jumbo loans, while still lower than the 20 percent delinquencies in subprime mortgages, signals that the borrowers with the most money and the best credit are hurting as the U.S. recession deepens in its second year. It also means these loans will be even more difficult to obtain and more expensive to pay off. Most of the mortgage defaults do not appear to be caused by poor loan underwriting but rather by growing job losses among high income earners. Due to the higher level of defaults, investors are becoming very reluctant to make jumbo mortgages for either purchases or refinances. Since Fannie Mae and Freddie Mac will not buy or insure jumbo loans, the lending bank must assume all the risk, keep the loan on their books and set aside additional reserves for possible losses. All of these additional risk factors are reflected in the higher jumbo rates and strict loan underwriting guidelines.

The difference in interest rates between jumbo loans and prime conforming mortgages, or mortgages eligible for sale to Fannie Mae and Freddie Mac and available to borrowers with top credit scores, had been about 40 basis points for several decades. The difference between the jumbo interest rate and the prime conforming rate was 150 basis points on Feb. 27, according to Bloomberg data.

Conforming Loans At 7%?

An interesting point to note is that the size of a mortgage loan is not the determining factor for the interest rate. Mortgage rates are based on many factors but the primary reason for higher rates on jumbo mortgages is the lack of a government agency guarantee. This implies that without price support from the government, conforming mortgages would also be in the 7% range to reflect the actual risk of mortgage lending in today’s environment.

No Relief In Sight For Jumbo Mortgage Homeowners

Given the higher risk on jumbo mortgages due to the factors cited above, homeowners who have high rate jumbo mortgages are unable to refinance to lower rates. In addition, the proposed mortgage plans meant to help distressed homeowners provides no assistance for jumbo mortgage homeowners.

While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That’s the lowest volume ever tracked by the trade publication, which has figures dating to 1990.
We have a few dozen investors that are now boosting originations, though they require a minimum 25% equity/down payment in the most expensive housing markets, up from 15-20% earlier last year. For condos, requirements can be as high as 45% equity/down payment.
If you have been able to … save for a down payment, that to us speaks volumes about your character.

Equity and cash is KING in this enviroment. FICO scores and income are great but they don't protect the investor in the unfortunate event of a default.

Some excellent 30 year fixed jumbo rates are available in the mid to low 6% range but they require a minimum of 25% equity and we find about 50% of the people that apply don't have any equity because they are in very distressed housing markets.

Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. “The million-dollar-and-above market is sinking like a lead weight,” Pasadena Luxury Homes guru Mr. Rivas says of Coldwell Banker.

Jumbo Mortgage Rates Reflect Lending Risks

Jumbo borrowers are discovering the meaning of “pricing for risk”. Mortgage lending has become a very high risk business due to the continuing decline of real estate values, the high risk of default due to economic conditions, principal impairment and/or rate reductions from loan modifications, the risk of bankruptcy court cram downs and government supported foreclosure moratoriums. Some may incorrectly believe they are entitled to a low rate mortgage regardless of risk factors. This peculiar belief by both banks and borrowers helped to create the destructive credit crisis we are now experiencing. The banks/investors are doing what they need to do with jumbo mortgages- setting rates to properly reflect risk.

Detail: Why can't I get a 5% 30Y Fixed Jumbo?