Could the return of jumbo loan market signal the easing of credit markets for the housing market in general, and specifically be a leading market indicator?
As reports about the recovery of the housing market continue to grow, larger high-cost home loans (referred to as jumbo loans) not guaranteed by the federal government are making a comeback. Reports indicate that lenders gave out $38 billion in private high-cost mortgages during the second quarter of 2012, which is an improvement of 65% from a year earlier and the highest quarterly dollar amount since the first quarter of 2008 according to Inside Mortgage Finance, a trade publication.
Many of these high-cost home loans, also known as jumbo loans cannot be purchased by the Fannie Mae and Freddie Mac, so they tend to be more expensive for borrowers. The recent reports come as good news for those who have been watching the banks anxiously. While there has been a slow and steady improvement in many sectors of the real estate market, the credit market has been slow to catch up. The increase in jumbo mortgages could be a sign that credit markets are opening up.
The recent demand for jumbo loans has increased due to a surge in luxury home sales. Sales of $1 million-plus homes rose 19% in July from a year earlier, according to the National Association of Realtors. The increase in demand for high-end properties is being driven in part by investors looking to make a profit, a buyer pool that has been missing since the beginning of the recession. Also jumbo loans that have typically been more expensive than regular loans have become more affordable in recent years. According to hsh.com, a website that tracks mortgage data,rates on 30-year jumbos now average 4.22%, down from 4.82% a year ago and 5.27% two years ago
For lenders, jumbo loans are more profitable as they provide a bigger spread between the interest banks receive and what they pay. However, the loans are a higher risk to the financial institutions as they keep most of them in their own books, and in case of default they incur all the losses. Recently, lenders have been more careful in their lending practices and are able to take on such risks because their balance sheets are in better shape.
Hopefully the reports are a sign that the financial institutions are more confident in extending the much needed credit that would propel the recovery of the housing market and the economy as a whole.
Michael Hobbs, PahRoo Appraisal & Consultancy