Shopping For a Jumbo Mortgage in a Distressed Market
November 17, 2008
Jumbo loans have been hard hit by the financial crisis, because the private secondary market into which most jumbos were sold, has largely disappeared.
During the period May 4, 2007 to November 7, 2008, the spread in wholesale interest rates between a $417,000 loan eligible for purchase by Fannie Mae and Freddie Mac, and a $418,000 loan that is not eligible, increased from 0.28% to 2.97%. Loans eligible for purchase by the agencies are called “conforming loans”. Loans larger than $417,000 are called “jumbos”. Borrowers shopping for a jumbo today face a difficult challenge in finding the best available deal.
Until July 1, 2008, the agencies could not purchase jumbos. However, as the private secondary market in jumbos deteriorated in late 2007 and early 2008, Congress passed the Economic Stimulus Act of 2008 in February 2008. Among other things, that bill authorized the agencies to purchase jumbos in high-cost areas. The allowable size of jumbos on single-family properties can range up to $729,750, depending on house prices in the county in which the property is located. This authorization for the purchase of jumbos lapses after December 31, 2008.
To complicate matters further, in July, the Housing and Economic Recovery Act of 2008 set permanent jumbo size limits which will kick in beginning January 2009, provided the current limits are not extended. The permanent limits are similar but lower, with a maximum of $625,500.
Readers can find the jumbo size limits for the balance of 2008 at http://www.ofheo.gov/media/hpi/AREA_LIST.pdf. If a county is not shown there, it means that jumbos are not authorized there.
Contrary to what Congress evidently expected, conforming jumbos are not priced the same as conforming loans of $417,000 or less. On November 7, 2008 when the wholesale rate on a conforming $417,000 loan was 5.76%, the rate on a conforming $418,000 loan was 6.33%. This was far better than the 8.73% on a non-conforming $418,000 loan, but why is there any difference at all?
Part of the reason is that the agencies are charging more on jumbos, presumably because they are more costly to process, more risky or both. A second reason is that the secondary market is treating jumbos as a special category of loan that may not be marketable through the efficient TBA (“to be announced”) pooling process. A TBA pool is the collateral for a mortgage-backed security that is priced and traded before the security is issued. Jumbos can only comprise 10% of the mortgages in a TBA pool, which allegedly lowers the price investors will pay for it. This treatment of jumbos might be temporary.
Given the current state of the market, borrowers today should place themselves in one of three groups. If they need a loan of less than $417,000, using a mortgage bank or mortgage broker will assure that their loan will end up with one of the agencies, and that their loan provider will have access to the best prices available. Borrowers remain vulnerable to excessive markups, however, which is why I recommend Upfront Mortgage Brokers (UMBs) for those who need hand-holding, and Upfront Mortgage Lenders (UMLs) for those who want to control the process on the internet.
If a borrower can’t meet the agencies’ credit, documentation and other requirements, they may still qualify for an FHA loan. Some of the UMBs and UMLs offer FHAs, and other FHA lenders can be found at http://www.fhaoutreach.gov/lender/lender.do.
If the borrower needs a loan larger than the agencies current jumbo limit in the county in which the property is located, in addition to UMBs and UMLs, borrowers may want to shop depository lenders -- commercial banks, savings and loan associations and credit unions. But this can be quite a challenge because of the wide disparity in their prices.
On Nov 12, 2008 I shopped for an $800,000 30-year fixed-rate mortgage on Mortgage Marvel, an on-line site that I reviewed earlier in 2008 (see A Look at Mortgage Marvel). The mortgage companies on the site quoted rates of 8.125% to 8.375%. The credit unions and banks, in contrast, quoted rates ranging from 5.875% to 7.875%. I have never before seen rate differences on the same transaction this large. They no doubt reflect wide differences in lender access to funding, which is symptomatic of a market in turmoil.
If a borrower qualifies for a conforming jumbo, meaning that he needs a loan larger than $417,000 but no larger than the jumbo limit for the county in which the property is located, he can probably do best following the procedure described above for a $417,000 conforming loan. Since he will be paying a significant premium over the price of a $417,000 conforming loan, however, he might also check out depository sources. He also needs to be mindful that the current jumbo size limits are good only to year-end unless Congress extends them. Otherwise, they will be replaced by the lower permanent limits.
Changes in the Market For Jumbo Mortgages
Jumbo loans have been hard hit by the financial crisis, because the private secondary market into which most jumbos were sold, has largely disappeared.
During the period May 4, 2007 to November 7, 2008, the spread in wholesale interest rates between a $417,000 loan eligible for purchase by Fannie Mae and Freddie Mac, and a $418,000 loan that is not eligible, increased from 0.28% to 2.97%. Loans eligible for purchase by the agencies are called “conforming loans”. Loans larger than $417,000 are called “jumbos”. Borrowers shopping for a jumbo today face a difficult challenge in finding the best available deal.
Until July 1, 2008, the agencies could not purchase jumbos. However, as the private secondary market in jumbos deteriorated in late 2007 and early 2008, Congress passed the Economic Stimulus Act of 2008 in February 2008. Among other things, that bill authorized the agencies to purchase jumbos in high-cost areas. The allowable size of jumbos on single-family properties can range up to $729,750, depending on house prices in the county in which the property is located. This authorization for the purchase of jumbos lapses after December 31, 2008.
To complicate matters further, in July, the Housing and Economic Recovery Act of 2008 set permanent jumbo size limits which will kick in beginning January 2009, provided the current limits are not extended. The permanent limits are similar but lower, with a maximum of $625,500.
Readers can find the jumbo size limits for the balance of 2008 at http://www.ofheo.gov/media/hpi/AREA_LIST.pdf. If a county is not shown there, it means that jumbos are not authorized there.
Pricing of Jumbos
Contrary to what Congress evidently expected, conforming jumbos are not priced the same as conforming loans of $417,000 or less. On November 7, 2008 when the wholesale rate on a conforming $417,000 loan was 5.76%, the rate on a conforming $418,000 loan was 6.33%. This was far better than the 8.73% on a non-conforming $418,000 loan, but why is there any difference at all?
Part of the reason is that the agencies are charging more on jumbos, presumably because they are more costly to process, more risky or both. A second reason is that the secondary market is treating jumbos as a special category of loan that may not be marketable through the efficient TBA (“to be announced”) pooling process. A TBA pool is the collateral for a mortgage-backed security that is priced and traded before the security is issued. Jumbos can only comprise 10% of the mortgages in a TBA pool, which allegedly lowers the price investors will pay for it. This treatment of jumbos might be temporary.
Shopping For Jumbos
Given the current state of the market, borrowers today should place themselves in one of three groups. If they need a loan of less than $417,000, using a mortgage bank or mortgage broker will assure that their loan will end up with one of the agencies, and that their loan provider will have access to the best prices available. Borrowers remain vulnerable to excessive markups, however, which is why I recommend Upfront Mortgage Brokers (UMBs) for those who need hand-holding, and Upfront Mortgage Lenders (UMLs) for those who want to control the process on the internet.
If a borrower can’t meet the agencies’ credit, documentation and other requirements, they may still qualify for an FHA loan. Some of the UMBs and UMLs offer FHAs, and other FHA lenders can be found at http://www.fhaoutreach.gov/lender/lender.do.
If the borrower needs a loan larger than the agencies current jumbo limit in the county in which the property is located, in addition to UMBs and UMLs, borrowers may want to shop depository lenders -- commercial banks, savings and loan associations and credit unions. But this can be quite a challenge because of the wide disparity in their prices.
On Nov 12, 2008 I shopped for an $800,000 30-year fixed-rate mortgage on Mortgage Marvel, an on-line site that I reviewed earlier in 2008 (see A Look at Mortgage Marvel). The mortgage companies on the site quoted rates of 8.125% to 8.375%. The credit unions and banks, in contrast, quoted rates ranging from 5.875% to 7.875%. I have never before seen rate differences on the same transaction this large. They no doubt reflect wide differences in lender access to funding, which is symptomatic of a market in turmoil.
If a borrower qualifies for a conforming jumbo, meaning that he needs a loan larger than $417,000 but no larger than the jumbo limit for the county in which the property is located, he can probably do best following the procedure described above for a $417,000 conforming loan. Since he will be paying a significant premium over the price of a $417,000 conforming loan, however, he might also check out depository sources. He also needs to be mindful that the current jumbo size limits are good only to year-end unless Congress extends them. Otherwise, they will be replaced by the lower permanent limits.