Disappointment, frustration over 'junior jumbos'

Old conventional wisdom: The new "junior jumbo" mortgages — in the $417,000 to $730,000 range — are going to lower interest rates, lure new buyers, and breathe new life into the California real estate market.

New conventional wisdom: The "junior jumbos" are a major disappointment. They aren't that cheap, they are hard to get, and they're not helping very much.

The New York Times reports tonight: " ... the effort to make it easier to get jumbo mortgages — loans over $417,000 — has yielded frustration and disillusionment. ... many prospective borrowers and their mortgage brokers say the new loans are either not available or the rates are far higher than they expected. Relief, they say, has been replaced by grief. The program 'is so much of a failure that it’s really unbelievable,' said Daniel M. Shlufman, president of the FCMC Mortgage Corporation in Clifton, N.J.

Numbers: A Santa Ana mortgage broker is quoted saying he can get a rate of 5.75% for a loan of $417,000; but if the loan is just a little bit higher — into "junior jumbo" territory — rates jump to 6.99%.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[Westside Bubble]

Why am I not surprised?

[Laker]

I talked to three different mortgage brokers and they all told me the same thing.
The junior jumbos are simply to expensive. Those that had dream of having these at 5% woke up to a nightmare...
But what do you expect? Freddie and Fannie simply adding fees to compensate for the increased risk.
However, I have some news for those of you like shockg and his pals. Please listen carefully:
What the mortgage people told me kind of shocked me in a way. They told me that the loans being expensive is not the real problem. The REAL problem is that there are NO loans higher than $417,000 that could be stated income. Also, there are no more 2nd mortgages that are stated!
I said, well what's the big deal...They all told me, that majority of people need to the mortages to be stated as some have income, but it is "not documented", some have income from other people in the family but only take the mortgage on their names, and some are simply overextending themselves, and now with these loans being full doc, they can't qualify for them.
Now, before all the puckheads jump and mention that they make $300,000 a year...yes, i know many people do make these figures....but we all know that there are far more people that make less than $100,000 household income combined, AND that these people did qualify and took mortgages to but $1,000,000 houses just as late as last year....

My conclusion, unless government makes some magic and we have stated loans again, not only fixed rate, but IO and minimum payment Option ARM loans to come back, there will simply be not enough qualified buyers to buy at current prices. It is so simple.However, take that $1,000,000 house and slash its price by half, now you can find a family that makes $130,000 combined household income that has $100,000 down. They could and would qualify for a $400,000 loan together with their $100,000 down, will buy that 2006 million dollar house for $500,000.

btw: since median price i LA is in the $410,000 range, why exactly do we need $729,500 as the loan limit for government sponsored loans>???
I guess i missed the part in the US constitution that says, that all citizens are owed a house in westside or san marino....

[Valley Observer]

BofA's acquisition of Countrywide may help. BofA doesn't do many loans that can't be sold to Fannie, Freddie or FHA, while CW would like to but doesn't have BofA's deep pockets to fund them. I wouldn't be surprised to see BofA being conservative with who can get a jumbo or junior jumbo, but offering competitive rates for those who qualify. Wait until July 1st.

[Josh]

Yikes, that should help keep the market unaffordable for first-time home buyers here in LA.

On a side note, my wife and I were just married. We are anticipating being hit by the AMT in 2008. Do people know whether you are able to deduct your mortgage interest if you are have to pay the AMT? Thanks!

[Cal]

These were doomed to fail the day Fannie/Freddie announced their underwriting criteria.. full doc, 15% down payment in declining markets, borrower has to be qualified at the fully amortized fully indexed rate, PMI for loan amounts over 80%.. it isn't interest rates that are killing the market.. it is rational lending criteria.

On a positive note, Ginnie Mae started working with these so the spread over conforming should narrow a bit. But even if the spread narrows.. it isn't what will save the market. Volume will return as prices return to fundamental levels. It is that simple.

I'm just wondering what the "NEXT" thing that realtors will hang their hat on. This was supposed to be "it", just you wait until the conforming limit is raised they would tell us. It is really too bad people don't take time to learn their craft and read the information available to them.

There is plenty of mortgage money available.. just few borrowers qualify. Either they don't make enough money or they don't have enough down payment. Now if this was a car, people would say.. "Well make more money or save more for a down payment". But once it is a magical mythical home it turns out this is a horrible burden and a terrible scourge inflicting the soul of America. People are strange.

[Gerardo]

If one can not afford to a 20 to 30% down payment on an 800k home, then they should not complain or cry about the jumbo rates. If you can not afford the home then too bad
G

[Wilson]

Hmmmm....I wonder why nobody wants to give out cheap loans for homes that are 50 percent overpriced...

Maybe because "loss of equity" is the number one reason for folks walking away...

It's really simple: DON'T BUY A HOUSE UNTIL THE MEDIAN HOME PRICE IS THREE TIMES THE MEDIAN INCOME. That means we are a few years away...

[Bill J.]

Peter-

Not that long ago there was an article in the press about how condo. loans were getting a lot harder to get. Now word is that the jumbo loans are not only at higher rates but its tough to qualify for them. See what is happening? It isn't just that prices are coming down - it's that capital is being removed from the real estate market. I can only see more downward pressure on prices.

[arroyogrande]

"how a wave of foreclosures and rising inventory of homes for sale will deepen and prolong the economic downturn started by the subprime mortgage crisis."

I just don't get how so many economists fail to grasp the reality of the situation....that the "economic upturn" of the past 5 years was fueled by Americans spending more than they could afford/make, by using home equity loans, car loans at greater than 100% loan-to-value, and credit cards. This "downturn" is the DIRECT CONSEQUENCE of that. People are tapped out. They need to pay off their debts and start SAVING a little. NOT by trying to stretch themselves into house payments that tap most of their monthly budget. When house prices have come down enough, the market WILL stabilize.

It seems that these economists (including our friend, Alan Greenspan), view the past 5 years as a perpetual motion machine, with ever rising housing prices fueling consumer spending. How can such smart people be so, well, dumb. In economics, that is not called a perpetual motion machine, it's called a pyramid or ponzi scheme.

It also amazes me that people like Shiela Bair (chairperson of the FDIC) are actively seeking to keep house prices high (her words). Would she be in favor of keeping energy prices high, or food prices high? After all, those commodities are just as much a necessity as housing is. I guess that current farm subsidies, including paying farmers NOT to grow crops, is the template for the future.

- arroyogrande

[jaded]

We have a condo that's fully paid off, good, steady jobs, no debt, money in the bank, and fantastic credit. Most of our disposable income goes straight to savings. And we're not buying a house until the jumbo rates come down, or until the prices fall so low that our cash down payment brings a mortgage down to under $417k.

We can play this game as long as it takes.

[jdj]

Realtorz and mortgage brokerz tried to keep a straight face when they claimed all that was needed was a rise in the conforming loan limit -- even Bernanke thought a limit of $1,000,000 might be just the thing, when he testified before congress late last year -- but now they are left with the unpalatable: admit that what they want is a return to the no-doc, pay-option loan, but that they want the tax payers to back them up now, instead of Countrywide.

[eprobert]

The bigger "non-story" is about those new FHA loans that were supposed to save the market up to $720,000.

I called WF to ask about them and while it's true they can underwrite down to 3% down payments and up to 50% total debt to income ratio, the rates are insane! Plus you have to pay PMI.

As a "what if" the broker told me that a loan for $450,000 on a $470,000 house with one point would be near 7.125% PLUS PMI of around 1%!

$90,000 dp on a $540,000 house would still be a 7.125% rate (FHA doesn't care above 3%) but no PMI!

This is all assuming above 680 fico, proper appraisals, etc.

Below 417k the rates dropped slightly but still not as cheap as you'd hope.

[Cal]

Anyone been watching the Mortgage Application index? I graph it weekly. It has been getting weaker and weaker. Now last year it was getting stronger in the face of declining sales because subprime was blowing up and more and more people were applying for loans with the participating institutions (not all banks participate).

So unless we have major non-member players just coming into the market that nobody has heard about... well , most people aren't buying a house without applying for a loan.

Which begs the question.. All this activity alleged by real estate agents, this tremendous uptick in spring activity. We aren't seeing it pull through in sales and aren't seeing it in mortgage applications. We have seen a slight increase in pendings Month over Month. That is it. So are agents spinning their wheels with unqualified buyers or just lying to us?

[Rich]

Interest rates ought to reflect the level of risk. Anyone who could get a $700,000 loan in a California market for an interest rate of 6.99% should consider themselves very lucky; that's not much of a risk premium to a lender who's likely to see you lose 20% of that value by next year. What this is really about is upside-down borrowers trying to refinance in such a way as to make their monthly payments comfortable, but guess what? You don't get comfort when you already bought more house than you can afford. I paid 8.75% on my first condo in 1994 and am paying 6.5% on house I bought in January of 08; both of these were decidedly non-jumbo priced homes and I factored those rates into the house-shopping process. Why do I have to be careful but you don't? That's where all the anger is coming from in this forum and in public opinion in general, that some of you want your privileged position to be ratified by the market...

[JohnnyB]

But Lawrence Yun said there would be a mini boom in California after the jumbo limit was raised.

I was taking that to the bank... preparing for the new California gold rush...bracing for the jumbo surge!

Shattered trust... how is one to cope...

Yun always seemed so in tuned with reality... along with our "representitive" leaders who spend so much time pushing the wrong agendas.

[150 multiple choice questions]

Hard to believe that all the geniuses who dreamed up this plan didn't realize it wouldn't work! Or maybe they did know (like many here did) and didn't care because they wanted to make a lot of noise on the news and to constituents but know there's nothing the government can (or should) do.

But don't worry everyone, Larry Yun says everything is fine and prices will recover in the 2nd half of this year! Oh, and you can turn on CNBC every hour and hear "the worst is behind us", in fact, they've been saying that for six months and before that it was six months of "it's contained to subprime".

Maybe the true silver lining in this mess is hopefully people will stop listening to "experts" and liars and salesmen and start thinking for themselves. Wait a minute, did I just write that?.. Don't worry, I know it won't happen.

[RZ]

Trying to resuscitate the housing market by helping with "junior jumbo" mortgage loans misses the entire point. The market is flailing beause it is difficult to get these loans; it's flailing because all the houses on the market are overpriced! This is like putting a bandaid on a broken leg...

[Corntrollio]

Pete, love your columns, but this is such a non-story. These loans have mainly been trumped up by realtors, but the reality is that all jumbos SHOULD have higher rates and SHOULD require better qualifications, like back in the good ol' days before Liar's Loans.

I also don't understand why people think 7% is "high" solely because of a few years of phantom cheap money told them it is. I think given the 10 year Treasury and current risk premiums, we should be expecting "normal" mortgage rates to be 6.5-8.5% or so when the Fed gets out of crisis mode, and still a bit more for jumbos. The risks are higher in a falling market for banks too, so this isn't a surprise.

[jaded]

Interest at 7% is high because the Fed has lowered the benchmark to 2%. Banks are supposed to follow, not stand in the way.

[puckhead]

Laker,

You telling me that your mortgage brokers can’t find ANYONE that’ll qualify for a $417K loan with stated income??????????? A $417K loan with 20% down and 30 year fixed will give you mortgage payments of about $2800, add in property tax and you end up at around $3200. That’s about rent on a decent 3br/2bt house in a good neighborhood. Three times NET income comes in around $9,625. Assuming that person/persons is taking home about 30% of their gross pay, then their gross pay is around $165K/year. So you’re telling me that your mortgage brokers can’t find ANYONE in SoCal that makes more than $165K that qualifies for a loan???? Me thinks you are either b.s.ing or your mortgage brokers need to market their services better.

[Corntrollio]

jaded, 30 year mortgage rates aren't based on the Federal Funds rate. They're more closely tied to 10 year Treasuries. I agree the risk premium has gone up a bit from the boom, but the Fed Funds rate isn't the proper index.

[Big Picture]

Jumbos, junior jumbos, rate drops, it's all part of the same fantasy, that people will keep borrowing for things they can't afford. Without all this borrowing the economy would have collasped 10 years ago when most of the 1-income households became 2-income and families still couldn't pay the bills. As health care costs went out of sight along with gas and housing no one had any choice but to live on credit. Party's over. The question is whether the revolution will begin when people realize they've been getting screwed all along by the only winner in this scam: the banks.

[Inland Empire]

This idea was insane the market is driven by first timers and the turn over of older home sellers. The young people never where the beneficiary of higher loan limits. They need affordable housing base on real lending standard not jumbo loans. The out of touch politician in Washington don't even understand what these kids are facing in home cost and income need in this market. They listen to lobbyists and only do what gives them a big political payoff. Higher limits was never about helping people get loan it was simple grandstanding.

[Laker]

puckhead, you got that totally wrong.
You CAN still get stated income but only up to $417,000 and must have 15% down payment
You CANNOT get stated income on a $600,000 loan...
I'm not BSing. This was verified by 3 different banks/ loan officers. If income is stated it makes no difference between income that qualifies be $165K or $90K since it is stated...they will not check that. Either you lie about it, or you have it but can show it.
In any event, there are people that do make $160,000 full doc. But not that many that could buy all the inventory...and they don't have the desire to but the $600,000 1000 sf shacks on 5000 sf lots.
So it is not the issue of mortgage people finding people that can qualify, it is about people that want to buy, but can't find (get approved for) mortgages to fit them.
I think at some point, stated income would only exist for people that would put 20-30% down. 2nd mortgages and HELOCS will never be stated again...

[puckhead]

Laker,

OK got it. Did not understand what you meant by "stated income".