Jumbo Loans Could Make a Comebackby
It soon might become easier again to buy a house worth $1 million or more.
That's because, despite the bruising that the luxury home market has taken over the past 12 months, rates for jumbo mortgages could finally fall to more affordable levels.
"We are actively pursuing more jumbo loans," said Vijay Lala, product executive for Bank of America (BAC). "We think they are a good asset for banks."
The average rate for a jumbo loan is still substantially higher than for "conforming loans," which are loans guaranteed by a federal mortgage agency that typically top out at $417,000, but can be as high as $729,750 in certain high-cost markets. The average interest rate for a jumbo loan, which unlike conforming loans aren't federally guaranteed, has dropped from a high of 7.9% at end of October to 6.63% last week. That is the lowest average rate since the end of 2007, according to financial publisher HSH.com in Pompton Plains, N.J. Of course, that's still well above the average rate of 5.07% for the smaller conforming mortgage. But the Federal Reserve's announcement on Mar. 18 that it would purchase an additional $750 billion of mortgage-backed securities backed by Fannie Mae (FNM) and Freddie Mac (FRE), and buy as much as $300 billion in Treasury securities, has raised hopes that interest rates will continue to fall.
Bank of America, which is offering jumbos through its retail branches and through its Countrywide Home Loans subsidiary, says its average rate for a 30-year fixed jumbo loan this year is 5.875% with a fee equal to 1% of the mortgage. But the underwriting requirements—as with other lenders in the luxury lending market—are strict. Borrowers need a down payment of at least 20%, a credit score of above 720, full financial documentation, and at least six months of cash reserves.
Good News for High-End Borrowers
Some wealthy buyers might have a little less money to spend on real estate if Congress passes a measure to tax heavily the bonuses for wealthy employees of banks that received taxpayer bailout money. The House passed a bill on Mar. 19 that would impose a 90% tax on bonus money. The Senate is considering a similar proposal.
Still, the news is good for qualified borrowers in expensive markets such as Boston, New York, and Washington and in states such as California and parts of Florida where many homes require loans larger than those Fannie Mae, Freddie Mac, and the Federal Housing Administration are permitted to buy. The median home in Manhattan, for example, was $955,000 in the fourth quarter of last year, meaning that half of homes sold for more than that, according to New York appraisal firm Miller Samuel.
The limit for conforming loans in most of the country is $417,000. Congress temporarily raised that limit to as much as $729,750 in the highest-cost markets, including Manhattan. But people needing larger mortgages have had a shrinking number of options since last year, when the secondary market for jumbo loans essentially dried up. Investors are no longer eager to buy mortgage-backed securities tied to loans that aren't guaranteed by the federal government. Few lenders can afford to keep such large loans on their balance sheets, and interest rates have climbed. But the federal government's injection of capital into a number of large banks has given them more money to lend. And for some, jumbo loans seem to be a good option.
"Some of the major lenders have gotten their act together and said: 'We can make serious money on the jumbo market and make it into a competitive business,'" said Guy Cecala, publisher of InsideMortgageFinance.com in Bethesda, Md., a mortgage industry newsletter.
Lower Risk of Default
The largest jumbo lenders are Bank of America, Wells Fargo (WFC), JPMorgan Chase (JPM), and Citigroup (C), Cecala said. The jumbo share of the total mortgage market dropped to 4.4% in the fourth quarter of 2008, down from 14.3% in 2007, he said. The jumbo market accounted for about $100 billion last year, he said.
Among the other lenders in the market is ING Direct (ING), which had about $10 billion of jumbo loans last year, about 40% of its portfolio. It is offering mortgages that adjust in five to seven years for a rate of about 5%. The loans require at least 25% down, a credit score of 660, three months in reserves, and full documentation, said Bill Higgins, ING Direct's chief lending officer. But like everything else in the loan business, the requirements depend on the risk. Loans above $2 million and in risky second-home markets would require a larger down payment. ING's average jumbo loan borrower has a loan of about $800,000, has put down 40%, and has a credit score of about 750, Higgins said.
Higgins expects competition to heat up in the jumbo market, especially since the spread between low interest rates that banks pay depositors and the rates they charge mortgage borrowers is so large and the risk—with tight underwriting standards—relatively low.
"I'd probably say some of the bigger commercial banks are probably looking at it," Higgins said. "It's a pretty good return from a risk and price perspective."
Keith Gumbinger, a vice-president at HSH.com, agreed that the risk of default is relatively low for jumbo loans because of the average profile of the customers. But they are not without risk, especially in markets with fast-falling real estate prices and deteriorating local economies.
No Wiggle Room in the Numbers
And for the consumer, getting a jumbo loan can still be a frustrating and time-consuming process. Banks are combing through pay stubs, bank statements, and tax returns and only accepting the cream of the crop, mortgage brokers and Realtors said.
"If you're qualified, you can get it," said Damon Germanides, a mortgage broker at CS Financial in Beverly Hills. "There's just no wiggle room in the numbers. Banks are asking a lot more questions."
In the resort town of Hilton Head, S.C., banks are requiring 40% down payments for jumbo loans because they're concerned about the risks associated with second-home markets, said James Wedgeworth, a Realtor in Hilton Head.
"Lots of buyers pay cash anyway," Wedgeworth said. "But these days, they don't have as much cash."
In Las Vegas, where foreclosures have battered all markets including houses priced above $1 million, lenders are reluctant to take risks on large loans, said Mike Dean, branch manager for Meridias Capital, a mortgage bank in Las Vegas.
"Anything jumbo is just impossible unless it's so cookie-cutter, and even then, there's no guarantee," Dean said.
Steve Hawks, owner of Platinum Real Estate Professionals in Henderson, Nev., said banks are concerned about foreclosures bringing down prices further and are requiring down payments of 30%. Homes that were selling for $3 million a couple of years ago are now listed for $1 million, largely because they've been pulled down by neighboring foreclosures. One street in Henderson has 18 homes priced at $1 million or more that are on sale, half of them are being sold by banks or by homeowners facing foreclosure, he said.
He calls it the "million-dollar massacre."
"The high-end market is starting to get crunched right now real bad," Hawks said.