Ice Age: How bad is the jumbo mortgage freeze?

We admit it, we borrowed the "Ice Age" line from The Great Loan Blog.  Cute headline, serious issue: A problem with jumbos is a deal-breaker for real estate in California -- this state lives and dies on jumbo mortgages and small downpayments. So we want to hear your thoughts about what's going on with jumbo mortgages ($417K and above). What we're reading:

Paper Money: "...the vanishing of the affordable prime Jumbo loan is easily the most significant development for home prices that I have heard all year.  Remember, the Jumbos have dried up for PRIME borrowers. ... And the cheap Jumbos are not coming back anytime soon."

The Great Loan Blog: "The media has done a very poor job of relaying the collapse in the jumbo mortgage market. ... Lenders such as Indymac, Countrywide and WAMU have increased reserve requirements and stopped taking stated income for loans with less than 20% down. The interest rates for full doc jumbo loans in CA have risen by .50-.75% for the most prime credit worthy borrowers. ... As the guidelines continue to tighten, and the reality of the freeze in the jumbo market sets in you will see sellers drop their prices as we move toward the credit freeze of winter."

Frequent Commenter Investorguy: "... lending literally stopped this week. ... There are hundreds of stories out there this week of fully-qualified borrowers who were told at closing that the lender couldn't offer what they agreed to. Until corporations and people can borrow again, this thing will get worse."

Your thoughts? Insights? Observations? We'd especially like to hear from real estate professionals on what's going on in the market right now -- are deals still closing?
Hat tips: Westside Bubble, The Great Loan Blog.

Comments

[war]

A little off topic (or maybe not), but I saw the LA Times story about people bailing out of their CDs and money market accounts at Countrywide...I believe the article even showed a picture of the West LA branch with people lined up.

Well anyways, I thought that Friday after work it would be interesting to stop by and see what the deal was. So I went to the West LA branch. The branch was pretty small and had a small waiting area in the front. All of the chairs were taken and the guy closest to the door had a clipboard with a sign in sheet on it. There looked to be 10-15 names on it.

One guy saw how surprised I looked and said something to the effect of "If you are here to make a deposit, you can just give the money to me". I think that was his attempt at making a joke to lighten the mood up a bit. I asked if people were there to pull money out and a few shook their heads yes but the others didn't respond one way or the other.

Anyways, I just said I would come back later but I thought it was interesting that the place was packed and that there was even a sign in sheet.

Just thought I would share.

[Jax]

Without easy access to jumbos, lenders who are sitting on REO's are going to forced to get very aggressive with pricing to move this inventory and raise much-needed cash if they want to stay viable. Countrywide has over 10,500 homes right now and many more will be foreclosed on over the next year as ARM's reset and the buyers won't or can't make the higher payments. To add to the problem, when all of the already-foreclosed properties hit the market at much lower prices, many buyers who only bought homes with the thoughts of using them as ATM machines or thoughts of selling them for huge profits may decide that they no longer want the debt associated with the home since it no longer represents a quick path to riches.

Home loans are no longer going to be easy to get and coupled with the problems that I mentioned above, a new reality will eventually become evident to homeowners in bubble markets that their home values are going to drastically drop..............probably 40%-50% (or more). Sellers won't be able to sell a home to a buyer if the buyer can't get a loan because the home is overpriced (today's prices) and if the home won't appraise for the selling price (compared to the comps that the aggressively priced foreclosures will be sold for). It's a very slippery slope and right now, it's raining cats and dogs so it's going to get much more slippery.

[An actual buyer]

I'm a real, live home buyer with a big down payment and a decent six figure salary. However, when my Pasadena agent told me that I would have to make a backup offer on a modest 3bdrm house that needed work and was still listed at $800,000, I walked. I'm done. I was told that $800,000 simply won't buy a small, high quality home in Pasadena. Sorry, folks, prices are simply too high. With $300,000 down I'm going to carry a jumbo loan and have a payment of $3000 a month - plus $800 a month for taxes. This on top of repairs, insurance and utilities. Nope, the price value ratio is simply wrong.

[AnnS]

Actually the crunch on jumbo mortgages is a VERY GOOD thing.

The insane speculation caused houses which sold in LA for $150,000 in the late 90s to soar to 3 or 4 times that price.

Drhousingbubble's blog has some hilarious prictures of shacks which would not be worth more than $75,000 if viewed realistically but where the sellers are asking $300,000, 400,000 and more.

When only 17.6% of the LA population can afford houses priced in the lowest 25%, prcies MUST come down. When the prices are so high that it takes a household income in the upper 10-11% of all incomes in the US to buy the lowest 25% of houses, that is NUTS!

You can not sell close to 100% of homes to 17,6% of the population.

If jumbos are difficult to get, it will depress property prices from the top down. Eventually that house that was $150,000 only 8-10 years ago will get back down to where it should be - maybe $185,000 to $195,000 and thus affordable to a family making about the median income of the area.

And that is how it should be.

[Cal]

The market isnt going away, the job of the Fed is to provide liquidity and they will tell banks that they will lend them the money if the loans are prudently underwritten (they will allow the loans to be used as collateral to borrow money from the Fed). Things wont freeze, just the cost of money will go up and sales will drop. The homeowner can then decide if they want market value for their home or take it off the market. The market would be functioning just at a lower volume.

The "problem" in the whole scenario would be that the loans would have to be prudently underwritten and that would eliminate the vast vast amount of people wanting to buy.

[r michels]

Margin requirements go up; less demand. Less demand; lower prices. It's just that simple.

[Monkey In Chief]

There are 2 issues the market needs to sort out with Jumbos. 1) the risk premium and 2) the maximum loan to value ratio

The current MBS melt down is causing the risk premium to be unusually high but I think this will sort it self out in a few months as the markets get better at distinguishing MBS full of toxic loans from ones with properly underwritten loans.

The bigger issue for California housing prices in that prime jumbo loans are probably going to need a 20% down payment. Figuring 10% transactions on a foreclosure, the lender is in the red if the home forecloses and prices have dropped more than 10%. And when I say dropped, I mean the price to sell the home for sure in less than 3 months. Although lenders are sitting on REOs for the moment, holding them not a solution especially as it becomes clear the price trend is down. Since there's a huge risk that prices are way too high, 80% loan-to-value seems to me be the minimum prudent one for residential mortgages to fit into their historical risk model.

There just aren't that many people who can put 20% on small 3 bedroom houses costing $800,000+ which means those 800,000+ prices are unsustainable.

[Cal]

Here is some advice from SNL:
http://www.milkandcookies.com/link/41738/detail/

[Steve]

Hallelujuah I say! This could be the silver bullet that brings SoCal prices back to normalcy. 500k for a condo? See ya! Try 300k like a condo should cost. 600k for 2+1 in a dumpy neighborhood next to the freeway? Bye-bye! And in a year or two when prices finally hit rock bottom, I'll be there to buy while everyone else can't qualify for a loan.

[Paul]

Buyer, turned renter. ( Home owner for 16 years. ) I've sold my house. The rental that I am in would cost me $4000 a month to buy.( million plus house) I rent for $2800. My down payment sits in a bank ( I know, bad ) paying 5%. $4000 minus $1000 a month tax = $3000. $3000 minus $1400 interest = $1600 a month to stay here. Ok, maybe a bit more if I spend some Principle. Why buy? As I do the math, I feel sorry for my landlord. Attention; Southern California on Sale! 50% OFF. I'll buy if things get real. When your Realtor calls, just say no! As a Prime borrower, I want a better deal than the banks now offer. I will not pay for their stupidity with the sub primes.

[shockg]

Paul, I find it very hard to believe you can rent a million dollar home for 2800 a month. You are one of the many self procalimed geniuses that claims to have the market pegged for a 50% correction. You can show us all the fuzzy math you want and claim to be renting a million dollar home for 2800 a month but i dont buy your story for one second. It amazes me at all the knuckleheads who brag about selling their home and renting until they time the bottom correctly and then jump back in. What have you really gained if you don't see a 50% reduction?

[Mike]

Hi Paul,

I did the same thing as you. I sold and am renting a house worth 1000000 for $3200.

Two years+ is realistic for a big price drop. Be patient, young one.

Mike

[AnnS]

shockg

You need to get real data - and not just go on your 'feeling' or guess.

Same thing is true in my area.

Waterfront home with 3 bedrooms, 2 1/2 baths on 2 acres rents for $1000 and would have sold for about $650,000 -750,000 in 2004-05. (And that is my neighbors across the street. My numbers are good - the village gossips like crazy and I knew what the rent was because it came up for rental this past winter, I was talking to the real estate firm handling the rental.)

4 bedroom, 2 1/2 bath Craftsman cottage (orginal and not a reproduction with all the original woodwork and floors - its just gorgeous) 2 blocks off the beach (and only 2 houses between it and the 300 miles of beach) on 1/2 acre would have carried a $400,000 -500,000 price tag when the market was up. It rents for $800.

So yeah, Mike and Paul are telling the truth.

We did the same as they did. We retired early, sold the house and travelled for time for a few years with the big RV. When we stopped travelling and decided to stay put, I took one look at the real estate prices, income and debt levels - and laughed. The frenetic increases in real estate prices coupled with huge numbers weird and dumb mortgages (ARM, option ARM, 2/28, interest only etc) was so obviously not sustainable that you would have had to be a complete moron not to see the collapse was going to happen sooner or later - and more likely sooner than later.

We opted to rent. I'm not so stupid as to pay 42% more in taxes,insurance and mortgage than it costs to rent the same property. And I have the 3 bedrooms, a 1/2 yard (with 1600 sq feet of perennial gardens), am 4 blocks from the grocery, PO, library, bank and shops and 5 blocks from the beach, and the view out my front windows is literally a 40 acre field and behind is a 10 acre woods and field.

My volunteer activities include counseling on mortgage debt problems and affordable workforce housing development (can't run a tourist economy without employees - and they can't buy $400,000 homes.)

[eprobert]

We rent a $600,000 house for $1700.

Last year we were looking for a house to buy. We must have seen 100 houses in Atwater, and we were getting dicouraged after our bids were rejected once again. We were ready to throw in the towel when we saw the "perfect" house. 1,000 square feet. Beautiful, landscaped yard. 2 car garage, 2 bedrooms.

It was in a neighborhood that we knew we couldn't afford - the house around the corner was listed at $680,000, and the one across the street went very quickly at $580,000. But this one wasn't for sale. It was for rent, for $1900 per month.

So we made the ll an offer of a 2-year leas for $1600. She countered with $1700 and we took it. She'd been trying to rent it for months, but no prospective renters had $3000 in the bank for a deposit. We wrote her a check on the spot.

So for the past year and a half, we've been renting a cute house in 90039 for less than 1/2 the cost to buy, even considering the tax benefits. And we couldn't be happier. We've saved almost $50,000 judging by prices, and we've saved $20,000 of our own money in that time so we have a downpayment.

Don't be a hater just because some people chose to rent instead of buy; those people are saving money every day that prices fall.

[skip]

I, too, rent a $1 million house for less than $3000....for $2700, to be exact. The owners bought the property for $1.1 million in June of 2006. It sits in a prime Sherman Oaks neighborhood. This is not "fuzzy math". These are the numbers. Welcome to the future...