It's been roughly three weeks since the Fannie Mae/Freddie Mac loan limit officially changed, falling 14% to $729,750. According to some mortgage bankers and Realtors the event is the equivalent of the world ending. Or is it?
To lenders in low-cost areas such as the Midwest and South the whole event is a big ho-hum. Ask a Detroit- or Cleveland-based loan officer about the issue and chances are you'll be greeted with a big yawn.
Do you know how much house $625,000 buys in those cities and the surrounding suburbs?
But in places like San Francisco, San Diego, New York and Boston, the loan limit falling is somewhat of a big (not so good) event. “The rich people?” asked Brian Benjamin, a broker who works the Northern New Jersey market. “They can wait. They don't need to buy now.”
Then again, there's also a school of thought out there that believes the “rich people” can well afford the extra points and fees on jumbos—and if they really want that nice house in Englewood, N.J., they will cough up the extra dough.
Of course, the so-called rich didn't get (and stay) that way because they're spendthrifts. The want a good deal just like everyone else. In time, they might pay extra but in today's depressed real estate market expensive homes aren't exactly flying off the shelves either. Benjamin is right: they can afford to wait.
A quick survey of lenders that play in both conventional and jumbo markets reveals that jumbo loans can cost at least one point more up front with the interest rate being higher by 50 to 100 basis points. Some of these costs can be lower depending on the borrower's downpayment, equity, personal assets and FICO scores.
Many of these newly originated jumbos will not be sold into the secondary market—at least not right away. Chances are, a 5% jumbo loan being originated by a lender such as Union Bank of San Francisco will sit on its books while being funded by 1% money. If my math is correct, that's 400 basis points of gross profit to play with. It's a sweet proposition indeed.
It was thought that once the Fannie/Freddie loan limit fell that a whole arm of jumbo conduits would rise up and feed hungry borrowers offering competitive deals. But where are these conduits? The industry has heard about them. In fact, National Mortgage News has written about them in these very pages. At press time I couldn't name one new jumbo conduit that is actually open for business and writing new loans for securitization. Can you?
That means, for now, that jumbo mortgages will continue to be a balance sheet product that winds up on the books of the megabanks, regionals and thrifts. (And a few credit unions.)
Over the past two years only Redwood Trust, a publicly traded REIT, has successfully securitized jumbos but only a handful of small deals have come to market. Is this Redwood's big opportunity? Time will tell.
Meanwhile, mortgage bankers and Realtors continue to lobby Congress about bringing back the $729,750 loan limit.
It's no secret that existing home sales are down. When the new numbers came out last week the National Association of Realtors was quick to blame the lower GSE loan limits. From a lobbying perspective it's a smart move. NAR can point to the new numbers and say, “Look.” But opponents of higher loan limits will counter: If not now, when?
The answer to the “when” question is simple: When housing values stabilize. But when will that be?
