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Jumbo Mortgage Madness: Where is the Salvation Promised By Higher Conforming Loan Limits?

Way out West in the land of JUMBO MORTGAGES, we don't get a volume discount when we borrow a BIG CHUNK of CHANGE to buy our PRICY real estate. We get a VOLUME PENALTY, and let me tell you, these days that penalty is HUGE. Jumbo money, no matter how you look at it, is ridiculously expensive as compared to that sacred cow with the magic number of $417,000: the conforming mortgage.

Its like saying that all women who weigh over 120 pounds need to pay double for their clothes. Who came up with that number of 120? How is that fair when it is a lot easier to weigh 120 when you are 5'2" as opposed to 5'8"? And if I am big-boned AND tall, why do I have to pay the FAT PENALTY?

You see, size does matter.

Sure we have movie stars and we have vineyards. Sure, we have sunny, 70 degree days in mid-winter , and only need air-conditioning about 3 times every summer. We can snow board, wake board, and surf board all in the same day, surrounding by all the majestic beauty that defines coastal California.

Because of all this, our real estate is, well, probably a lot more expensive than yours. We Coastal Californians justify this like those gorgeous ladies on TV: Why? Because its worth it.

But lately, finding jumbo money at any kind of reasonable rate has turned California Dreaming into a California Nightmaring. Where is the salvation promised by the increase in conforming rates?

When starter homes cost $600,000 and basic homes cost a million bucks, there is a darn good chance someone will need a loan of greater than $417,000.

We foolishly bit, hook, line, and sinker, when the Feds promised they would raise the limit on conforming loans. Most Coastal California counties were awarded the highest limit: $729,000. For about 10 seconds, we thought all loans between $417,000 and $729,000 would carry the same low rates as those below $417,000. But no, we were wrong.

Our first clue was the wording that made the higher limits "retroactive" to last summer. Okay, what does this mean? Could it be that the REAL reason for the increase was to "restore liquidity"? Banks everywhere have been forced to "portfolio" (or retain) their jumbo loans, because governmental agencies would only buy loans of less than $417,000. As liquidity dried up, RATES SOARED. Extending limits allows banks to sell the bigger loans currently in their portfolios, therefore restoring "liquidity" (the ability to loan more money).

Our second clue was BANKS set the rate for loans, not the Fed. NEWSFLASH: Banks STILL don't want jumbo loans, even though they can dump them. A bunch of little loans spreads the risk much more nicely than one big loan, and the increase is only temporary.Why encourage those big loans when the whole abilty to get rid of them goes away at the end of the year?

So last week the first few lenders finally provided the guidelines for the new, higher limit loans (most awkwardly named "temporary limit increase agency jumbos").

Although the limits are higher, these loans are still a sad step child in the mortgage world, carrying rates much higher than conforming loans, and the rules to qualify are far stricter.There are plenty of little "gotchas" too. For example, the loan is ineligible if a relocation package is assisting the borrower. Please don't ask me why. It makes no sense to me, either.

In addition, many lenders have credit score criteria that is higher, and have pulled out the old "declining values" penalty, which lowers the actual loan amount if the county is in a "declining value" market, which includes just about every county in the state.

Are there options? Well, yes. Lenders who portfolio their loans anyway are grabbing the niche that exists between the $417,000 and the $729,000. They offer only ARMS, and not 30 year fixed rate financing, but rates are much lower. Too bad everyone is focused on getting that 30 year fixed money right now after being stung by an adjustable.

There is FHA, which now carries the new higher limit as well, but carries costs that a non-FHA loan does not. And finally there is the old tried and true first and second combo, with the first loan capped at $417,000 and the second loan ( assuming you can find one) making up the difference.

For now, the volume penalty on larger loans is very much like the FAT PENALTY. Many Californians (who can't help it if they are big boned) will simply wear what is in the closet for now.

Maybe you can now weigh 135 pounds instead of 120, but what does it matter if they have JACKED UP THE PRICE OF CLOTHES ANYWAY?

Written by Janet Guilbault, California Mortgage Expert based out of the San Francisco Bay Area

Posted by Janet Guilbault California Mortgage Banker/Broker on 03/26/2008 10:08 AM

Comments (47)

mortgage crisis, california mortgage expert, mortgage rates, california mortgage broker

47 Comments on Jumbo Mortgage Madness: Where is the Salvation Promised By Higher Conforming Loan Limits?

MAR

2008

My goodness. This is so good. Analogies work and, sadly, the fat comparison is easily understood by everyone.

One thing I know for sure. The new rules and regs make absolutely no sense, i.e., declining values, expiration of limits, etc. It's just a mess.

No wonder folks are just wearing last year's stuff.

Interesting perspective Janet, I really hadn't thought of it like this but you make some valid points. Something to chew on for sure...

Janet, I loved your post! When I heard that they were going to put the new conforming Jumbo's into separate bond pools and do it retro-actively, I knew that this was for the banks and NOT for consumers. The new conforming rates are about .625% to .875% higher in rate after all the add ons and loan level price adjustments...just a smidge below what the regular Jumbo pricing is. This is going to help a few folks for sure, but it is not the "panacea" that it was touted as!

Hi Lenn: If memory serves me right you are also in a high dollar area. Would love to know the East coast perpective.

Matters have gotten worse because people actually thought this would save their butt (refi-wise) or help them qualify. Neither has come to pass, but the year is still young. It is hard to convince someone to refi when their adjustable is so low right now, and jumbo rates are high.

Realtors were hoping for increased activity, but when someone visits me about a prequalification they are expecting a rate that starts with a five. Unfortunately, those rates do not exist except for those with much lower loan amounts.

Jason: Not whining, just making the observation that so far, no STIMULUS has emerged in our market as a result of the new higher limits. The FHA will have a much greater impact, I am sure, but does not fit most of my clients. Maybe I can change that as time goes on. Financing definately is tied to the price of real estate, and these new limits will have an impact.

What impact, I am just not sure. Maybe rates will go down once the banks start offing their big loans. That is what alot of people think.

Hi Rich: Agree with you completely. This is definately a disappointment after all the hoopla about the salvation of the jumbo market. It was mainly for the banks, and after I read it and understood it, I knew that too. But with rates SO HIGH for jumbos, I still held out hope that the new loans would be .250 to .500 higher, not the whole point or so that they have turned out to be.

So far, I can't make one of these loans fit anyway! Too many darn brick walls stuck in the guidelines. Bummer!

What I don't understand is why the markets can't differentiate between non-conforming due to loan amount and non-conforming due to other factors such as being a stated program or such? Are the larger loans going belly up at any faster rate than any other loans where people actually qualified for the mortgage? I don't think so, but I could be wrong. Any of youknow?

Bob Mitchell

ValueList Real Estate Services, Inc.

Good question. I don't know if larger loans are going belly up any faster. I guess NOT. Does anyone out there know the answer to this?

The terms conforming/non conforming are about loan amounts. Then once that is determined the other guidelines apply.

I got stuck on the 120 lbs. I've never heard that one. But perhaps that's because I've spent 21 years teaching fitness classes on the side. Muscle weighs 3 times more than fat. Whoever came up with a pound limit obviously didn't have a clue!

OK. I'll go back and read the real post now =)

MAR

2008

what agreat picture of the elephant.

Fannie and Freddie have different guidelines for these new loans. Freddie is allowing cashout...it is a steep hit and only to 75%ltv, but you should check with your lenders that are LP oriented if you have a cash out or a 2nd that you want to combine with the first mortgage. Fannie requires that all existing 2nds, purchase money OR not, be resubordinated.

Janet, we to are in the land of Jumbo loans. Actually my wife and I were talking last night and we think we have only sold 2 houses in the last few years that were not a jumbo loan. Both of these were both large down payments and brought them under the $417,000 threshold. We have ran into these same problems a few weeks ago. We went from jubilation to shock.

We had a client under contract on a 1.6 million dollar property with an 772 credit score verifiable assets in excess of the home price, tax returns to verify income, and a 35% down. He even got a pre-approval letter from the lender. Sounds great right. We were informed 3 days before the close that bear and sterns was the purchasing the loan and they were no longer buying loans. We now know why! They stated they could not find any one else to take the loan and would have to pull out because they could not find any other company to purchase the loan. However they would fund it at a much higher interest rate themselves.

They stopped taking my clients calls, my calls and would not respond. This is a fairly large mortgage broker and they do self fund many loans. It just so happens that our clients attorney is good friends with the corporate attorney of the mortgage company. He placed one phone call to the their attorney and the next morning they agreed to fund the loan themselves at the original terms.

It is amazing what it takes to get a jumbo done in some cases these days. By the way we are not in a declining market we are actually listed as stable to inclining by most appraisers.

Unique perspective and a lot is true. However there are lenders with aggressive rates in the high 5's and lower 6's for jumbo mortgages out there.

Great post and really great graphics. Definitely what you say is true. Thanks for sharing.

Janet,

Great article, sad but true. The Feds are going to have to come up with a better plan if we are going to get back up on our feet out here in the West. Unfortunately, I work in an area in Oregon that is very similar to some of the California markets. We can only hope for the best !

There is a rational reason for the limit. $417K is a lot of money for someone to owe. If I owe $250K and make $90K a year; great. If I lose my good job and the economy is slow so I will have to drive a truck and work (heaven forbid-at McDonalds) at night too, but my family will stay in the house and we won't miss a payment. When your clients are borrowing $800-$900K that can only be supported by TWO full income jobs, there is more risk present. One person loses a job, and a mortage payment is missed, if they get a divorce, they have to sell the house immediatley.

California is beautiful, when my kids are grown I'd rather rent a one bed Apt in San Francisco than live in a 3000sf suburban house in flyover land. But as a taxpayer, I don't want the GOVT to insure any of the bubbleicous loans in CA and as an investor I would demand a risk premium on a jumbo loan in all circumstances.

We may not have 24hr sun, but Manhattan is at $1100 sqft for something with no bells or whistles, and Brooklyn nipping at those heels. As for the upstate market we also work in a county home is typically in the $500-600k range for something small that needs a lot of work.

Higher rates on jumbo mortgages aren't the greatest, but I agree that those who want to purchase an expensive property with a jumbo mortgage...they should pay a higher rate. Otherwise, save more and leverage less to get what you want.

Okay East Coast Buyer: Why can the guy with the $250k mortgage moonlight but the guy with the $800k mortgage can not? Why can the guy with the lower mortgage survive a divorce, but not the guy with the $800k mortgage can't?

So 2 full incomes is a riskier loan than one full income? How so? Because you have a wife stashed away that could go to work if times get tough? Some might argue that having 2 incomes spreads the risk.

Sorry, but I just don't get your logic.

Cree: Why do you think there should be higher rates on Jumbo mortgages? Just because it is a jumbo mortgage does not mean there is more or less leverage going on.

What makes an "expensive" property anyway? Do you somehow think those people who have a mortgage of more than $417,000 should pay a luxury tax? These are people buying starter homes in California that are being penalized and their houses are far from being considered expensive in our market.

Jason and Deanna: Thank you for sharing your jumbo story! Wow! That deserves its very own post.

I think very special areas in our country, like yours, are immune to declining values. San Francisco (the city) falls into this catagory. How fortunate for you that you don't have to deal with that...it is tough.

I also have had many cases of pristine buyers with large downpayments struggling to get loans. I tell them not to take it personally. You have to understand when banks don't want to loan money they can come up with a million excuses not to!

Of course, the excuse from Bear Stearns has to top them all.

Very interesting analysis. I think you hit it on the head -- this is to help stablize the mortgage crisis. It is very temporary and we will have to see what develops.

Excellent post Janet! They've made it all very confusing... my rates sheet now has programs called "Conforming Jumbos"... Well which is it, conforming or jumbo.......???

At least you get to enjoy the sunshine!!!

Kevin: I know what you mean. We have all these names for everything in the mortgage world, but we can't seem to get a grip on what to call these loans. I'm like you...It really isn't a jumbo anymore, but they keep calling them jumbo agency loans. I'm sure there will soon be a nickname that sticks.

Joan: these loans will get easier and cheaper once they start selling them to the gov't agencies. Banks are still conservative because this has not started yet.

I don't see a difference in fluctuation between the amount of foreclosures we see being tied to the type of mortgage loan. It all comes down to the needs of the buyer and the situation they're put in. I do however see there are more people with loans <400K that are getting screwed.

Why can the guy with the $250k mortgage moonlight but the guy with the $800k mortgage can not? Why can the guy with the lower mortgage survive a divorce, but not the guy with the $800k mortgage can't?

Sorry, but I just don't get your logic.

I earn a good income as do most people buying a $250K house (in the rest of America). But sometimes, your whole industry slumps (Realtors, mortgage brokers, software, construction). If I'm use to making $90K a year as a professional, I can replace a good bit of it right away by just sheer willpower and hard work. With a non-working spouse, yes she can contribute as well. We have fall backs. High income people in sales, talent agents, company vice presidents and other executive types are just as liable to have a small cash reserve (or else the would need 80-95% jumbo loans) but they can not hustle enough to replace their lost income immediately. If they tried it would be counterproductive and reek of desperation.

Having to have two full time incomes to just meet your monthly needs dramatically increases the chances of problems. If either one fails, the shortcoming is present but the other is in no position to assist. At least with one income there is more flexablity in accepting new work to resume a high salary, with one still employed spouse relocation is less feasible. America is streched thinner than ever by borrowing too much and maximizing their sunny day income while still pushing their budgets and not setting aside for eventual obstacles. I don't want to cast stones, but Realtors get alot of blame for encouraging this too. Have you seen the Suzanne commercial? Dual income families should not commit to spending their combined incomes unless they have enough in reserves to weather a very long dry spell.

This is the factual reason that Jumbo loans cost more. If your "rich" folks were so financially secure then they wouldn't need the loan. When banks compete and all come to the same conclusion, there's a reason. $600K for a starter home is not normal, nor is trying to raise a family of 4 in Manhattan. People make choices on where they live, and they live with the consequences. I as a taxpayer don't have any sympathy for those who want to live someplace nicer than I get to live but pay less than marketprice.

www.youtube.com/watch?v=Ubsd-tWYmZw

Maye that's why one wholesale lender has dubbed the product "Confumbo" The name fits, don't you think?

hey east coast according to your logic the conforming limit as is, is too high. Believe it or not there are folks out there who make more than 90K annually and make 200K,400k, 600k, annually and prices are higher for homes(such as Manhattan) and even with a 600K down payment, guess what their loan is still above 417K. the reason why their paying a premium all this time wasn't because their a higher risk, but because the lenders were selling to different markets. this "stimulus package" was supposed to increase the loan limits so the lenders can sell to Fannie and Freddie and create a larger market thus enabling better pricing. it didn't go in that direction due to the ridiculous restrictions and pricing hits, however there's no reason why the "rich" should take the hits. Janet's jumbo is funny albeit a sad satire of todays market.

well done Janet

Where is the salvation promised by the increase in conforming rates?

I think someone ran the numbers.... and said: "Oooops!! We need to charge more"

Janet,

What is funny about my story that I did not add. The mortgage broker told me that if the loan was conforming and the client had a regular job with a paycheck and only 5 % down it would be easier.

Lets face it risk is risk. In todays economy a millionaire with great credit lots of cash and assets is less desirable than regular Joe with a regular pay check. The banks are looking at this wrong they are lumping arms and alt -a loan borrowers all together. Just because these have recently had a higher default rate.

We need to get back to some sanity. If you qualify you qualify. The banks changed the rules and allowed regular Joe to play with these loans and are now paying for it. Unfortunately everyone seems to be also.

MAR

2008

Yael Ishakis,

I didn't fall off the turnip truck yesterday, as a mortage broker in Brooklyn you of all people should know that high income jobs are less stable. Any Bear Sterns clients? How about Aurthur Andersen or WorldCom? Did the folks raking in the big bucks laying fiber optic cable in 2000 have another high paying job lined up? My point is, almost everyone in America changes careers several times in their life, often not by choice. Middle income America is better situated to deal with these changes and move on. If you are loaning $ to upper income people, you have got to admit that their ability to sustain the high income consistently for 15-30 years is not possible for most (outside of the medical profession). Most rich people will do just fine, since they are rich and have cash in the bank. Those high income people who need the jumbos because they already spent their disposable income on German cars, high fashion and vacations are now going to pay thru the nose for their supersized loans...as it should be.

If I worked on Wall St (a choice I made not to do) and I make $400-$500K, I wouldn't borrow $1.2M to buy a $1.5M place. I would bank half my salary until I could buy a place without a Jumbo Loan. Anyone who makes big money and spends it all and then wants to borrow alot more is nouveau riche and a risk to lenders.

check the statistics east coast.... its not the jumbo's that are defaulting!!! its the 250K its conforming loans going bad. its very nice and all to knock the rich, or to tax the rich, or blame the rich... bottom line is their paying a price for everyone else's problems.

East Coast Buyer: I am not a mortgage broker in Brooklyn. I am a mortgage broker in California.

Your description of the people who want to buy houses that are between $1.2M and $1.5M is not accurate, at least for my mortgage practice.

They are established business owners and professionals (not Wall Street moguls) and nine times out of ten you would have no idea they make the kind of money they do. They are not going out of business any time soon, and not in danger of being fired (they are self employed).

Certainly they do not fit the profile of nouveau riche as you have presented it. However, I for one, am thrilled if they want to drive a Mercedes, if that makes them happy. You seem to think we somehow should penalize the guy who has been successful. Why? He has probably provided jobs to "middle America". Someone made a commission when he bought that Merecedes. Someone made money when he took his wife out to dinner to celebrate. Get the idea? It isn't a crime to enjoy wealth you know.

You do not need to make $400,000 to $500,000 a year to buy a $1.5 million dollar place. You wouldn't be considered rich if you DID buy a house in that price range. But you would want the tax break provided by leveraging this house up to a million $ loan, and hopefully have the rest of that cash you saved up in a retirement account somewhere.

Yael,

I'm not knocking the rich, who else can afford to give me a good job or pay the taxes for my kids school.

I'm calling out all the nouveau riche wannabe posers who aren't rich at all and the loan officers that enable them (with credit repair and structuring of loans). The best way to lose a fortune in investment banking is to "check the statistics" for the last few years and then lend accordingly (today's headlines as an example). So in addition to calling you out, I'm saying it's pathetic to whine about the "sad satire of today's market". People should buy stuff with money they earn and not overextend themselves on credit to buy a house that requires all they can make to service it. If you can't afford to live somewhere without a jumbo loan then maybe you shouldn't live there in the first place.

If you had $2M in cash to invest, would you loan it to a 29 yr old hedge fund analyst who makes $450K a year for 5.5%? I didn't think so. Neither would any bank I'd invest in either.

Janet, Great post! I think it all comes down to the buyer. Make your day a great one!

Janet,

Yeal is a loan officer in Brooklyn.

I do think you should make 1/3 the value of a house if you need to finance it.

Anyone who does buy $1.5M place may not be "wealthy" but the certainly need an above middle class income to pay for it. There is a tremendous amount of risk in both the stability of the income and the underlying value of the collateral. That is what the Banks demand the jumbo premium for. It's a simple buisness decsion.

Yael: Sorry, I did not realize East Coast was responding to you.(I read these comments backwards from the most recent). I don't recall every reading a post written by you, so if you are new, please let me encourage you to write more often. You are terrific.

What is funny is you had the same reaction as me....why is this guy so MAD at people who make money?

Thanks for bringing up some points that we as mortgage brokers understand, but the public often does not. The whole jumbo logic is so confusing. Thanks for the support.

Tom: You are hilarious! Oops is right. The thought out there is the lenders are being conservative until they actually begin selling the loans. Once they feel a little more secure, they will lower the rates.

hmmmmm..... well, now..... the .625-.875% increase on a good day is a normal adjustment for conforming versus jumbo...... it is the rules that don't work for me, not the rates...... the actual guidelines of these new loans don't seem to be hitting the mark on helping many folks.... but again, thankfully my clients are in the right loans already..... and for purchases we need to do fha where the rate is the same regardless of the loan amount...... the lenders don't want the business really and obviously you can tell by the way they structured it...... when my clients ask me what I think of the new limits I said all along, I am much more interested in the guidelines...... it does force us to be creative though..... seller carrybacks are definitely coming back!!

Lets face it risk is risk. In todays economy a millionaire with great credit lots of cash and assets is less desirable than regular Joe with a regular pay check.

Absolutely the truth. I have a lawyer and a professor (married to each other) great credit, a million in reserve, house appraised at $1.4M....bank turns it down because they don't like it that part of their income is from renting the guest house. Seriously! And they claim this rental on their taxes, as well.

Proving my point that in an environment where banks do not want to lend, they can be very creative about dreaming up excuses not to lend. It makes the job of mortgage broker extremely frustrating.

Not to mention people like EAST COAST BUYER who think all those successful people with money don't deserve a break, anyway.

east coast your entitled to your opinion. however facts are facts. banks demand a premium since there are not enough investors buying US mbs, not because of the layering of risk. this stimulus bill was supposed to alleviate that problem, but it turned out to be a waste of time.

Janet I'm new here and I'm having so much fun!! go out there and write more loans...

Janet,

I LOVE rich people!

You don't respond to my logic and then counter points I'm not making.

How can you in one statement say "jumbo logic is so confusing" and be the California Mortage Expert "that we as mortage brokers understand". I'm a CPA who reads the Wall Street Journal. I've explained three times the logic behind why Jumbos cost more.

It is hard to make a man understand, that which his livelyhood depends on him not understanding.

I have contempt for posers whose net value is probably negative with the housing bust in full effect who ran up the price of homes while wildly bidding with other people's (pretend) money. Once this train wreck is over I'm going to buy a place that I can afford to pay for. Borrowed money is not wealth. It's not what you have, it's not what you make, it's how much you have left over that defines wealth.

Jennifer, Welcome to ActiveRain! Thrilled to have a SoCal perspective. I have said MANY times, it is not about the rates, it is about the guidelines, so I agree with you completely.

I realize FHA is the alternative, but once the loan amount is so large, the MIP is $10k. My clients are saying. "WHAT??????" Why do I have to pay that. Then, of course, you hit them with the monthly.

I know I need to get used to this, but honestly, for now I am disappointed that we don;t have more to work with for our jumbo clients.

This is all about securitization of mortgages. Banks want to unload MBS but the market is thin so they're discounted. Just like the spread between ARM's and fixed should be wide but they're not. Why? The secondary market. Hedge funds and investment banks are going under because the value of the securitized mortgages are being discounted daily and margin calls can't be met. If and when the market settles, the price of MBS will fall back in line. There will be more pools driven off of the risk of the pools rather than how it was done in the past. Do banks want to spread the risk between multiple smaller loans risk base priced that can be unloaded, or do the want to carry fewer jumbo loans and have a more concentrated portfolio that they can't unload? This is all about what banks can stomach now and where we will be when the last shoe drops. The mortgage business is in a defensive posture right now and we still have a ways to go. Good luck.

Do banks want to spread the risk between multiple smaller loans risk base priced that can be unloaded, or do the want to carry fewer jumbo loans and have a more concentrated portfolio that they can't unload?

Exactly. Thank you for your knowledgable and well thought out comment.

Janet, How did you get that elephant clown to stand still long enogh to take that picture? :-) Unfortunately, I don't have to worry about a Jumbo loan.

MAR

2008

According to Loan Performance, a unit of First American CoreLogic, a real estate information company in Santa Ana, about 870,000 borrowers took jumbo ARMs -- mortgages of $417,000 or more -- from 2005 to 2007. In the fourth quarter of 2007, 8.10 percent were two or more payments late, it found, while 2.62 percent were in foreclosure and 1.35 percent had been foreclosed. All the numbers were up from the third quarter.

Mark Zandi, chief economist for Moody's Economy.com, predicted that eventually 8 percent of these jumbo ARMs will be foreclosed. In the first quarter of 2008, "the delinquency and foreclosure rate will clearly be higher," he said.

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