About Loans

Cross-Posted with www.freerateupdate.com. The source for mortgage rate news.

The value of luxury homes has been declining for 3-4 years now depending on the particular city. We won’t go into specific markets here as that is better explained on a granular level by the Case-Shiller Research and individual neighborhood analysis of 750k-4m luxury homes by your local luxury realtor. Above 4m is rarified air and is declining but has much different dynamics such as what the NFL/NBA/MLB contracts will look like in 2012 and if the hedge fund industry will continue to pay the large performance bonus numbers of the recent past. You get the idea.

Luxury home prices shouldn’t be declining some could say because:

• Financial markets the world over have recovered nicely from the March 2009 lows.
• Unemployment is running less than 4% for seasoned, highly skilled, well educated professionals (doctors, engineers, lawyers, etc). The rest of the working economy is running north of 10% unemployment if you believe the official stats.
• Jumbo loan borrowers didn’t do the crazy exotic financing that imploded in subprime and pay option ARMs weren’t very common in the 1-4m market.

I agree in theory but what is often misunderstood by jumbo mortgage borrowers is the crazy lending that was done during the bubble years of the last decade that pushed values up almost daily. They don’t know the huge impact on luxury home prices of removing the steroid juiced lending of Bear Stearns, Lehman et al. The thousands of banks/brokers that sold their ultimately toxic/destructive jumbo loan programs that ended up in bundled securities that investors curse the day they bought.

Everybody knows we have had massive government bailouts and are in a recession. But they didn’t know that their home was appreciating rapidly during the bubble because everything was being bid up in their neighborhood, city and nationally with juiced money from casino like investment banks. Most clients I speak to thought their neighbors had better paying careers or had been better investors/savers. No, they were outbidding and buying on the juice of Wall St casino money. Also the move up buyers with equity in their starter home that are ready to buy in the gated community are on the endangered species list in most cities.

With the steroids that powered crazy out of your mind lending removed, the puffed up and totally juiced real estate market of 10-30% annual price gains in some markets is gone and never to return. Hopefully. The inventory of homes for sale priced at $750,000 to $1 million is now 20 months, vs. 11 months for homes in the $100,000 to $250,000 range, the National Association of Realtors reports. With all these forces at work the body of luxury real estate is shrinking back to normal based on the fundamentals of ability to pay and put a healthy down payment of hard earned money into a home purchase.

Did you know that at the height of the insanity most people could borrower a million dollars with a strong FICO score and a reasonably believable stated income?  No money down and little document verification! Those are the luxury foreclosures that litter Florida, Arizona, Nevada, California etc.

The return to sanity with the jumbo loan lending of the banks and credit unions left standing has resulted in substantial equity requirements, fully documented income, a verified chunk of savings/investment assets and a requirement of 1-2 full appraisal reports of what the home is worth now based on sales of similar properties in the last 30-60 days.

I feel for the luxury homeowners that have “…lost hundreds of thousands of my equity.” But the money wasn’t real unless they cashed it out at the top via a refinance/HELOC or a sale. The casino lending is gone and hopefully won’t return again. The most critical element in getting the best and most competitive jumbo mortgage rate is EQUITY.

My crystal ball is in for repair so don’t be mad if I am not perfectly correct on this prediction but we believe that jumbo loan rates will be higher within the next year and luxury home values will continue to slowly decline in most cities across the country as the effect of steroid lending wears off and return to the stability of real local economic fundamentals. If you need to refinance your jumbo mortgage within the next few years it’s prudent to explore your jumbo loan options now. As always, have a prosperous day.

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).

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.

File this under: Jumbo Mortgage Rate Warning.

Analyst: just a follow-up question on rates. I just wanted to understand, Howard, how you are thinking about the impact of the Fed exit on the fixed-income market and how you are planning on managing the balance sheet for that?

Howard Atkins, Wells CFO: Well, that is a good question, Betsy, andthe Fed obviously is active in buying MBS. And despite the fact that the yield curve is as positively sloped as it is right now, their active purchases is a factor that is, in some senses, artificially keeping long MBS yields lower than they might otherwise be. At some point presumably, they will either gradually or more quickly reverse course and that could lead to an increase in mortgage interest rates. And as I mentioned a couple of times in my remarks, in possible preparation for that, we have been keeping our powder dry, in effect underinvesting this large base of core deposits that we have for the possibility that that reverses course.

Analyst: So you might get some OCI hit near term, but dry powder leads you to a better outlook for earnings, is that the way to think about it?

Atkins: Yes, again, while the mortgage business is showing good results right now, in effect, on the portfolio side, the investment portfolio, we, in effect, are giving up some current income. We don't believe in the carry trade and we do want to preserve some powder in case rates do go up and we'll have the powder at that point, we will invest the powder at that point to offset some -- whatever is going on in the mortgage business.

John Stumpf, CEO: I see this as the classic short-term view of the business and long-term view of the business. 400 basis points or something like that, which you make in the carry trade today is very attractive. But we think it is the wrong decision long term because we think the bias is for higher rates, not for lower rates and we are willing to wait for that to happen. We think that is the better trade.

Atkins: we are effectively giving up 400 basis points today for possibly a year or so, maybe plus or minus, to avoid the potential risk of a larger number of basis points for 30 years. So the last thing we want to do is get stuck with securities at these low levels of interest rates. 

Stumpf: Because I think when rates move, they are probably going to move at some speed and I don't think it's going to be maybe a quarter. It could be more than that and it could happen relatively quickly.

Atkins: this is the same thing that we did back in 2002, 2003 when interest rates were also at cyclical low points just before they went up a lot. What we are doing now is not very different from the way the Company has always managed itself.

So they are positioning themselves for much higher rates in mid 2010 and beyond.