Friday, August 17, 2007

Jumbo loans locked up?

Perhaps the biggest question for Westside real estate demand is what's happening with Jumbo loans? Over the $417K conforming limit that Fannie Mae and Freddy Mac will buy, they're necessary to consummate most sales here.

From The Great Loan Blog, "Mr. Mortgage," a Pasadena mortgage banker (thanks for the detailed answers to my questions):

The guidelines for doing a jumbo mortgage have tightened dramatically in the last few days. Lenders such as Indymac, Countrywide and WAMU have increased reserve requirements and stopped taking stated income for loans with less than 20% down. The interest rates for full doc jumbo loans in CA have risen by .50-.75% for the most prime credit worthy borrowers. A client making $200k gross income (everybody right?), with $1k monthly payments on the credit report for cars, putting 20% down qualified for an $825k purchase using standard debt to income ratios two weeks ago. You move rates to 7.75% and the client only qualifies for $777k. Jumbo mortgage rates are averaging 7.75% for this scenario for a 30Y fixed. Which everyone should have, it makes no sense to gamble with an adjustable if you are planning to live in the home more than a few years.

As the guidelines continue to tighten, and the reality of the freeze in the jumbo market sets in you will see sellers drop their prices as we move toward the credit freeze of winter. Buyers can no longer go to their mortgage lender and get the rocket fuel financing that propelled the luxury market between 650k-1.5m. Above these loan sizes clients tend to have substantial active and passive income from stocks, bonds, and small businesses to manage almost any lending squeeze. Working class vs asset class. Don't worry about the rich, they always find a way to make it.

Is stated income still ok as long as there's 20% down? Is less than 20% down ok with documented income? How much less than 20%?

Yes, going full doc a client has to come in with 5% down to get any reasonable pricing. The rates on the second mortgages are around 10% also. This is up from 8.25% for clients with perfect FICO and excellent income.

Stated income is OK with at least 10% down required. The rates are in the 8-9% range on the first. Very few clients go this direction as the rates are very high since the jumbo market freeze.

How have these ratios changed recently, and do you expect further tightening?

The debt to income ratios have gotten tighter in the last two weeks. I would expect all banks to move down to more responsible levels over the next days. Remember as a mortgage investor, which loans would you want to buy from the mortgage bank: 35% DTI or 50% DTI. At the end of the day, it's the risk level the market will stand for a given loan scenario.

From Paper Money:

The availability of “Jumbo” mortgages, i.e. mortgages that exceeded the current OFHEO limit for Freddie Mac and Fannie Mae conforming loan status (currently $417,000 for a single family home), have essentially ground to a halt.

I say essentially because you can still get a Jumbo loan provided you give full documentation of your income (tax returns, pay stubs etc.), put down 20% on the purchase and are willing and able to finance the remaining principle at an over 7% interest rate.

Use now and see for yourself… fixed rate, ARM, Interest Only… it doesn’t matter they are virtually all over 7% and almost non-existent if you’re not putting down 20%. ...

The availability of cheap Jumbo’s is absolutely necessary for these areas to maintain any volume and fluidity of home sales, now they are gone and the first signs of the impact should be seen in the home sales statistics compiled during the next several months. ...

Be sure to read this update from Paper Money on why this matters so much.


war chest said...

Re: Countrywide (I also posted this on LA Land blog)

I saw the LA Times story about people bailing out of their CDs and money market accounts at Countrywide...I believe the article even showed a picture of the West LA branch with people lined up.

Well anyways, I thought that Friday after work it would be interesting to stop by and see what the deal was. So I went to the West LA branch. The branch was pretty small and had a small waiting area in the front. All of the chairs were taken and the guy closest to the door had a clipboard with a sign in sheet on it. There looked to be 10-15 names on it.

One guy saw how surprised I looked and said something to the effect of "If you are here to make a deposit, you can just give the money to me". I think that was his attempt at making a joke to lighten the mood up a bit. I asked if people were there to pull money out and a few shook their heads yes but the others didn't respond one way or the other.

Anyways, I just said I would come back later but I thought it was interesting that the place was packed and that there was even a sign in sheet.

Just thought I would share.

war chest said...

And my opinion/advice on this matter would be that if you have funds at Countrywide (or any bank for that matter) that exceed the FDIC limits, then you should trim your holdings down to be within the limits immediately. The whole point of investing money at banks is for the safety (i.e. FDIC coverage).

If I had money with Countrywide that was within the limits, I would leave it there until maturity and then reevaluate later. Personally I would probably leave funds at Countrywide (within FDIC limits of course) but for those who are more skeptical/worried, pulling out after maturity may make sense. However, I don't have too strong a view since I don't do CDs or hold money market funds at banks.

Eric J. Fox said...

Great post..I couldn't agree more. As bad as it was in California before this jumbo situation, it will get much much worse.

Victoria C. said...

Finally, FINALLY we're going to begin to get some downward price action on the westside. What a welcome relief it will be.

And it will feel good that purchases will be based on sound fundamentals of ability of the buyer to pay for the house over the long term.

What a collosal disservice to the American people the Federal Reserve has been as well as the entire mortgage banking industry.