Sunday, September 09, 2007

Getting a Jumbo Loan: testing today's market

If wholesale lenders have difficulty finding buyers, this will be reflected in the prices and other terms they quote to mortgage brokers and small lenders. And that's what I decided to look at.

My data consists of wholesale price quotes from 12 large wholesale lenders. As a base case, I first defined a "cream-puff loan" -- this is a 30-year fixed-rate mortgage for $417,000 on a single-family property being purchased as a permanent residence for $550,000 by a borrower with a FICO score of 720 and who fully documents income and assets.

All 12 lenders quoted prices on the cream-puff at various rates. The prices are points plus small fixed-dollar fees, which I combine into one price. At each rate, I have the price quoted by each lender, so I know not only the best price, but also the dispersion of prices by the different lenders. The quotes are as of Aug. 7.

For example, at 6 percent, the lowest price was $4,039 and the highest was $6,589, with other quotes in between. This is a spread of only $2,550, which is exactly what one expects to find in a well-functioning, competitive market.

In my second pass, I upped the loan amount to $418,000, leaving all the other features of the loan unchanged. It remains a cream-puff loan in all respects other than size -- it is now a "jumbo" loan, ineligible for purchase by the agencies.

At the same price, jumbo rates were 0.625-0.75 percent higher. I do not have a comparable figure for the period just prior to the recent market upheavals, but I have looked at the spread on many occasions over the years, and it was always 0.25-0.375 percent. To my knowledge, the current spread is larger than it has ever been.

The price dispersion was also higher on the jumbos. For example, on a 6.625 percent loan, the best jumbo price was $4,494, but the highest was $11,639, a spread of $7,145. On 7.5 percent loans, the best price was a rebate of $5,059 while the highest was $14,987, a spread of $20,046. Two of the 12 lenders did not provide any price quotes on the jumbo.

With my third pass, I changed the jumbo loan from a purchase loan to a cash-out refinance, and from full documentation to no documentation. Everything else remained the same. This moved the loan into a much riskier niche.

Only four of the 12 lenders quoted prices for this loan, and one of the four was way off the mark. At 8 percent, the best quote was $3,253; next best was $10,623; and the worst, $13,218. The best quote by the fourth lender was $14,091 for a 9 percent loan.

“Everything was great until about a month ago. Then, on one day – Thursday, Aug. 9 – everything changed as lenders shot up rates on jumbo loans to 9 percent and further tightened guidelines,” said Syd Leibovitch, owner of Beverly Hills-based Rodeo Realty, which mostly deals in homes worth more than $2 million.

“It became almost impossible to find a jumbo loan.”

For 10 days, Leibovitch said, sales of high-end homes came to a screeching halt. “We lost about a half-dozen deals,” he said.

Finally, towards the end of the month, sales picked up a bit as alternative sources of financing – chiefly savings and loans and credit unions – began to step in.

The mid-range market went through similar turmoil last month.

“We had a dramatic slowdown in activity in August. When the credit crunch hit, people didn’t know what to do and they just froze. It was like the Sept. 11 aftermath all over again,” said Gregory Holmes, associate manager with Coldwell Banker residential brokerage in Studio City.

Holmes said that “shock to the system” washed out almost all the buyers with less than prime credit or those who were unable to come up with 20 percent down payments.

However, he said there are still some buyers who do qualify for prime loans and can come with a $150,000 down payment on a $750,000 home. “They are just a little harder to find now than a year or two ago when we had all those bidding frenzies.”

This is bad news for all borrowers other than those seeking cream-puff loans for $417,000 or less.



Anonymous RayW said...

Without all the funny money floating around anymore...who's going to be buy all the overpriced houses in those Livermore neighborhoods?

This market was kept afloat because people with money were willing to assume the risk. Now the risk is too expensive to chance and money has withdrawn from the market.

Unless money is found inside of California to keep the Bay Area, LA and San Diego's prices floating, the bottom is along way down. No money will be coming into the state and the feds aren't going to be interested in adjusting the jumbo limit up for what amounts to probably less the 5% of the total housing stock in the US.

Just me...but on the other hand..

3:28 PM  
Anonymous Crissa said...

I'm looking at a condo development in my neighborhood and wondering who's going to pay three quarters of a million dollars for an apartment no bigger than the one we're renting @$1100/mo...

To need $225K cash down when the houses next door (a trailer park) has ones valued at less than that...

Ugh, I don't know how or why someone would do it.

3:34 PM  

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