How Jumbo’s Improvement Affects Everyone Elseby Tim Manni
The financial downturn nearly wiped out every home loan product but conforming loans (those backed by Fannie and Freddie). For the last two years or so, qualifying for jumbo loans has been even more difficult than usual. However, things seem to be turning a corner for borrowers looking to get an expensive home loan. Some recent headlines seems to say it all: “Jumbo Mortgages: Bigger Is Better, Again,” “Jumbo Loans Easier to Find.”
Given the fact that jumbo mortgages — loans greater than $417,000 in most areas — make up such a small portion of the marketplace (currently about 3-5%), and given that they generally affect only “wealthy” people, you may be saying to yourself (and me), “big deal, how does this affect me?”
It turns out, the current improvement in the jumbo market impacts a lot more consumers than merely jumbo borrowers.
The Redwood Trust Offering
“Redwood [Trust Inc.], a real estate investment trust founded in 1994 to invest in mortgage securities, with a focus on jumbo loans, has taken it upon itself to restart this dormant sector of the industry,” writes Sara Lepro of National Mortgage News. Last month Redwood securitized $238 million worth of jumbo loans.
Whether you have read about this offering or not, or whether you even understand loan securitization or not, what Redwood has done could potentially dictate how all home loan investors will participate in the mortgage market from here on out. This offering will test the market demand for private (non-government-backed or guaranteed) mortgage investments.
“While quite small, this is the first non-guaranteed, private-market offering since the credit crisis began,” said HSH VP Keith Gumbinger. If you are a regular follower of this blog, you know that we feel strongly that once private demand supplants federal control of the mortgage market, things have a much better chance of returning to “normal”.
Jumbo Mortgage Rates Are Dropping — What Does That Mean?
Given the high lending standards jumbo borrowers are held to, the less-risky nature of the jumbo borrower (higher credit scores and incomes) and given the fact that competition is beginning to form between jumbo lenders, jumbo mortgage rates have fallen substantially:
…rates on jumbo loans have also fallen to their lowest levels in years. Last week, the average 30-year fixed-rate jumbo loan carried a 5.76% rate, just above the all-time low of 5.55% in June 2003, according to HSH Associates.
“The rust has slowly been shaken off as banks re-learn how to do portfolio lending,” says Gumbinger.
“The availability of money has improved and the price of that money has improved,” says Gumbinger. “No one would characterize it as great, but slowly but surely, things have been getting better.”
Simply stated, banks are willing to lend more, which is a good thing.
How Does the Jumbo Market Improvements Affect Other Borrowers?
The top tier of the mortgage market (jumbos) dictates how the rest of the market functions to a certain degree. Our housing market is a natural trade-up market, explains Gumbinger. Americans are always looking to upgrade. “When one piece of the market is stymied, it clogs up the rest of the system.” An improving jumbo market helps the entire system function better as a whole.
Furthermore, once banks begin doing well lending in a certain area, they should be more willing to branch out into other opportunities — whether that’s non-jumbo loans, credit cards, auto loans, or what have you.
Government Intervention Could End Soon (At Least It’s Scheduled To)
Prior to the financial crisis, Fannie and Freddie didn’t back any loans higher than $417,000. The financial downturn forced so many private investors out of the market, jumbo borrowers couldn’t find lending anywhere. To cater to this under-served audience, Fannie and Freddie began guaranteeing home loans of up to $729, 750 in some markets. However, this “expanded conforming” limit is set to expire at the end of the year.
In closing, improvements in even a select portion of the mortgage market can have a profound impact on all other borrowers. We’ll keep our eye on the Redwood offering to see how the private market reacts, and we’ll be sure to keep you posted.