Economists' Commentary:Jumbo Loans

In recent months the availability of jumbo loans has decreased while

the interest rate spread between jumbo rates and ten-year treasuries

has widened. These developments are having a negative effect on the

housing market.

With the increase in the lending limits for conforming loans, the

mortgage market now has three major types of mortgage products:

conforming loans, up to $417K; conforming jumbo loans, up to $729,750;

and jumbo loans, loans over $729,750. Although the upward revision of

the conforming loan limit is a positive development, overall the jumbo

loan market has experienced problems of limited loan availability and

higher than usual rates in recent months. First, increased credit

standards required from borrowers coupled with the increasing

reluctance of financial institutions to make jumbo loans have posed

major problems at this end of the market. In addition, the interest

rate spread between ten-year treasuries and jumbo loans has

substantially increased—making jumbo loans much more costly than has

previously been the case and significantly impacting the upper ends of

the home market.

Jumbo loans have typically had a rate 1.34% points above ten-year

treasuries in 2005, rising to 2.56% points as of March 2009. The

increased spread does not appear warranted by increased risk.

Jumbo loans are a small part of the market today. For example,

jumbos were approximately 5% of transactions in March of 2009, and

super jumbos were less than 1% of transactions. However, these loans

have been of significant important in high cost areas and states, such

as California, New York, and Florida.

Adverse jumbo market impacts are believed to result in downward

pressures on the rest of the housing market. Decreased jumbo loan

availability appears to work its way down through the market, further

depressing other home prices.

NAR conducted a member survey in order to obtain REALTOR® input on

the jumbo loan situation. This type of information provides insight on

the operational impacts of national trends on the operational level

from the people immediately involved with housing transactions.

Respondents were asked for their opinions on a variety of specific

issues. In addition, REALTORS were asked through an open ended

question to share additional comments on issues of importance to them.

The summary statistics as well as representative comments are provided

below.

Loan Rates: Higher loan rates relative to conforming loans and

relative to historic practice were cited as a problem by an

overwhelming majority of REALTOR® respondents.

“My clients are mad that with their financial clout, the rates on jumbo loans are too high.”
“Rates are not coming down, they are going up, and the minimum credit score requirement is too high.”

Jumbo loans are less available: There appear to be fewer loan providers for jumbo loans: 30% of REALTOR® respondents.

“It is difficult to find banks that will even look at a jumbo.”
“Banks are not lending. If you hear otherwise, it is not true, it is not accurate.”
“A lot of the jumbo market were self employed no doc loans, and they aren’t available anymore.”

Loan requirements are increasingly unrealistic. REALTORS® indicated

that required down payments were greater than 20% in 60% of the

cases—with payments required greater than 30% in 9%.

Required down payments have increased to a point where prospective

purchasers are having real trouble: 43% of REALTOR respondents.

Buyers are being told that their incomes are too low relative to mortgage size: 13% of REALTOR® respondents.

Buyers are having trouble qualifying based on credit scores: 20% of REALTOR® respondents.

“The tighter underwriting requirements for mortgage insurance are hurting all the loans. Plus warehousing is a big problem.”
“Mortgage lenders are requiring a lot more income documentation
that would not have been needed. Also the 2nd note lenders are super
conservative to a ridiculous point.”
“Jumbo purchasers are often self employed, have multiple properties
and investments, and the banks are finding them unqualified to purchase
even with excellent credit and the process is painful requiring full
documentation of all rentals, investments, etc.

Buyers are Delaying purchases: Buyers are delaying home purchases due to jumbo loan home rates: 35% of REALTOR® respondents.

“The high costs of Jumbo loans, including points, discourage many
buyers. I work in a high end project and our buyers have all but
disappeared. We’ve had a couple of cash buyers but not one offer where
jumbo financing was involved.”
“The higher pricing involved in jumbo loans have knocked a lot of
potential buyers out of the market, making it far more difficult to
sell higher priced homes.”

Buyers are being forced to drop out of the market: Buyers who want

buy cannot get jumbo mortgages or do not want to pay higher jumbo rates

appear to have dropped out of the market: 85 percent of REALTOR®

respondents.

Incentives exist for 1st time buyers which allow the next tier of

buyers to buy up in value. With such high jumbo rates the natural

progress from the first time buyers to the higher end buyer is being

stymied. I can understand the increase in down payment requirement but

NOT the increased mortgage rates.

“The high jumbo rates have had an effect of lowering home values.”
“In the Los Angeles market most all homes are sold with jumbo
loans. The lack of available lenders is strangling a market with pent
up demand. It seems less a problem with borrowers and sellers, more an
issue of a lack of willing lenders.”
“Purchase price: $1.5 million. Down payment required due to
self-employment: $1 million (66%)!!!. The jumbo lending guidelines are
going to destroy a large percentage of the market and sellers that have
to sell now.”