What would happen if luxury home prices increased 18.0% in less than 30 days?  Sounds like 2005 all over again right? You're probably wondering if you can buy one as a pre-sale, right?

What would you say if I told you that, in a way, prices have already increased that much even in declining markets? 

Well, something very similar has definitely happened, but it's not positive.

Unfortunately, the "prices" have not actually gone up for the people who own them, only for the people who are buying or refinancing them.

Think I'm crazy?

Read on and you'll see my reasoning for this statement.

In the past few weeks, 2 major changes the pricing and underwriting of Jumbo Loans have caused many borrowers to fall short of qualifying for Jumbo loans.

Change #1: The Pricing for Jumbo Loans ( Jumbo Loans are conventional loan amounts greater than $417,000) has worsened by approximately 60 basis points (.600%) in the past 3 weeks.  There is no true way to explain this other than it is a simple case of the market overreacting, and the banks taking advantage through the gouging of their high end / prime customers to subsidize the losses coming from their lower end / sub-prime customers.

Change #2: The 7/22/07 FNMA underwriting guideline change requiring that borrowers obtaining conventional loans that with interest-only payment options must qualify for the loan based on the full Principal Interest Tax and Insurance Payment (PITI)

How does this possibly equate to a 18.0% increase in home prices?

Let me show you;

Assume the following;

Purchase Price of Home:              $625,000

80% LTV Jumbo Mortgage:          $500,000

Buyer/Borrower Monthly Income:   $10,000

Impact of Change #1: 

Now, assume that the rate for a Jumbo 30 Year Fixed Interest Rate loan with interest-only payment has gone up from 6.750% to 7.375% in the past few weeks. (this represents the .600% increase mentioned above)

Payment Before Increase (a) $500,000 @ 6.625% Interest-Only = $2760.42

Payment After Increase (b) $500,000 @ 7.375% Interest-Only = $3072.92

Increase in monthly payment over past 20 days = ( b - a ) = $312.50

This adds 3.1% to the debt to income ratio of the borrower earning $10,000 per month ($312.50 / $10,000)

- Making it harder to qualify and eroding purchasing power

Impact of Change #2: 

Next, assume that the borrower must wishing to obtain the interest-only mortgage must qualify for the fully amortized payment. (I can leave out the tax and insurance figures since they are the same for all scenarios)

(a) $500,000 @ 7.375% Interest-Only                 = $3072.92

(b) $500,000 @ 7.375% Fully Amortized Payment = $3453.38

Increase in monthly payment ( b - a)                  =  $380.46

This adds 3.8% to the debt to income ratio of the borrower earning $10,000 per month ($380.46 / $10,000)

- This is a true expense, and again, makes it harder to qualify, and erodes purchasing power.

So together we have a total increase in payment of $692.96

Calculated by :

(More Expensive Payment from Rate Increase + Difference between Interest Only & Qualifying PITI Pymt)

This results in 6.92% increase to the debt to income ratio of borrower/buyer earning $10,000 per month.

The additional $692 that the buyer must have to qualify for the loan at  the higher rate is the equivalent of having a loan of $112,596.61 @ 7.375% with an interest only payment.

$112,596 + The purchase price of $625,000 = $737,596.61

This equates to a price increase of 18% of the original sales price.

Calculated by:

( $112,596 / $625,000 ) or ($737,596 / $625,000) ; both yield the same result.

Summary;

The 2 major changes to pricing and underwriting of jumbo loans that took place in the past 3 weeks are similar to home prices increasing 18% in a 3 week period; the only problem is there is no benefit to anyone, other than banks.

Instead of housing prices continuing to increase, we've got lenders taking money from the top to pay for the bad loans they made to the bottom, and keeping the home values flat.

These recent changes are keeping many homeowners from qualifying for homes because of the new qualifying requirements and the higher rates.

Now how can anyone make the case that the current changes in the mortgage industry are positive by any measure?

Guess it's one way to control "inflation" in the housing market.  The reason I say that is because this concept actually falls in line with the increases to prime rate and the new regulation that virtually doubled the amount due for minimum credit card payments earlier this year.

This begs another question, are the people that are best qualified (Jumbo Borrowers) being penalized, and forced to shoulder the burden of the lenders that have non-performing sub-prime loans?  There has been very little change to the conventional conforming loans (loans up to $417,000), so it is obvious that no-one is wanting to settle the typical home owner/home buyer with any additional burden, and also obvious that they want to promote homeownership for first time buyers.

The effect that these changes is going to have on luxury homes is HUGE!!!

PS - I also think this is especially relevant to Builders and Agents selling new homes...

In Western Washington, and many other areas, new home prices tend to set the pace for the rest of the market. I don't see how this could possibly benefit them in any way.

David Mordue / Mortgage Planner / Liberty Financial Group - Kirkland / - http://www.dreamhomewa.com/