(Editor’s Note: This morning we welcome back Tim Fiero, Mortgage Specialist with HomeServices lending. Tim has been a home mortgage consultant for more than 20 years, and has earned the respect of and is referred by some of the most professional and accomplished real-estate agents in San Diego. He loves what he does for a living, and he is really, really smart.)
I used to love to read The Far Side comic strip written by Gary Larson. One of my favorites was titled “The Real Reason Dinosaurs Disappeared” and it showed dinosaurs smoking cigarettes. Well dinosaurs no longer roam the earth, but jumbo loans still do.
Let’s define what we mean by jumbo. We are referring to “non-conforming” loans — loans that do not conform to Fannie Mae and Freddie Macs loan limits. Those limits right now are (in San Diego county) $697,500. So we are referring to loans above that amount. There are a number of reasons why we do not see too many these days and why Kris did not pull up any in her numbers. Let’s take a quick look at history in this market, how we got to where we are, and where are we going.
I think it is safe to say that the jumbo market, in California was first serviced by the Savings and Loan industry. The reason I state this is that back in the 80s, when real estate values increased far beyond Fannie/Freddie loan amounts, the S&Ls did most of the lending. A million dollar loan was usually funded by Home Savings, Home Federal, Great American, Great Western, or American Savings. They normally required 20 to 25% down and of course most of these loans were fully documented for income and assets. There were some “stated income” loans then — they were normally known as “EZ quals” — however, they were not the norm. They were scrutinized for common sense, self-employed people only, and the people who did receive them had the assets to support the income that was on the loan application. Then along came the “Savings and Loan Crisis” where most of the larger S&Ls went under. I don’t have a PHD in S&L history, but most of the S&Ls that went under, went under for two reasons:
- Venturing into commercial lending without the expertise needed.
- The government changing the rules on them in regards to “good will” accounting.
So between the time so many S&Ls went under and the remaining S&Ls merged into what became Washington Mutual, one thing came running to the rescue: Securitization. Securitization simply meant that loans were made to borrowers and pooled together and sold to investors. Those investors could be insurance companies and pensions — anyone who needed a fixed return. In the 90s, this started to really pick up steam and roared with us into the “new millennium.” Most of the major players in this market were Wall Street brokerage houses. Can you say “Bear Stearns?” (Probably not, if you are a former share holder). Bear Stearns, Aurora, Lehman Brothers and other companies grew this market by loosening underwriting guidelines. Contributing to this was Countrywide, Washington Mutual and Indymac — all direct lenders and banks who took in deposits to some degree. Now they are a gone, dead and buried, and so is Bear Stearns. My understanding is one of the larger buyers of these pools of mortgage backed securities was….can you guess? AIG. If AIG was not a buyer, they helped insure these pools. Thus, one unit of AIG was the cause of its biggest problems.
So the lessening of guidelines, like getting a “Fast and Easy” (name brand for stated-income at Countrywide) really pushed up home prices in this space. There were loan products out there that were stated income and assets with as little as 10% down. Guidelines went down and prices went up. “Hey I can buy the million dollar home”! (Notice the word buy versus afford).
Where are we now?
There are fewer lenders in this space, and they are not in the position or willing to take on risk of adding these loans to their balance sheets.With the commercial market deteriorating, this compounds the problem. There are few buyers for these loans, given the performance investors have seen in this decade, so the remaining buyers are not too trusting.
Let’s take a look. Jumbo fixed rate guidelines can require 6 to 12 months of payments in reserves post-closing. A one million dollar home needs 20% down ($200,000) plus anywhere from $36,000 to $72,000 in reserves. The reserves drop as the down payment increases.
On a $1,250,000 priced home with a 20% down payment, the payments would be around $7,500 per month and you would need to make around $240,000 per year to qualify. You would also need reserves as stated above.
We all know the story now. The industry was way too loose. Had we documented loans the way we do now, growth would have been slower and sustainable, and equity increase would have been more secure. Our economy would have been the tortoise, not the hare. We would still have equity in our homes, and we would not be singing. Think of Sting’s “I want my MTV” and replace it with “I want my Equity”.
So, the summary on jumbos is:
- Fewer lenders taking less risk.
- Tougher underwriting standards.
- Less move up equity.
- Few truly qualified borrowers.
- Not as many buyers stretching their reach.
Jumbo loans aren’t extinct; they still roam the earth, just in lesser numbers. They are fully documented loans, so you actually have to prove you can pay them back. But with fewer lenders lending jumbo loans, tighter guidelines, fewer people who actually qualify, and fewer people with equity from selling current homes to move up, there are fewer of these loans being recorded.