Interest rates on jumbo loans over $729,750 have edged down from well above 7% in late 2008 to an average of 5.9% in mid-March, signifying a possible return to lending fundamentals in high-cost areas.
During the height of the boom years, between 2005 and 2006, jumbo loan interest rates were typically a quarter of a point higher than standard conforming loans. After the foreclosure meltdown, the interest rate spread between a standard and a jumbo loan expanded to about 1.7 percentage points in early 2009 as lenders were reluctant to issue high-risk loans. Today, jumbo mortgage rates are back down within 1 percentage point of standard prime loans.
Down payment requirements have also been relaxed. The average down payment requirement for jumbo loans last year was 25%. Many larger lenders are now requiring only 20%. Given the near-50% decline in luxury home values since 2007, the lesser 20% down payment makes expensive homes more attainable by California buyers.
For buyers in high-cost counties, the good news continues: Freddie Mac, Fannie Mae and the Federal Housing Administration (FHA) will continue to insure jumbo loans, extending the increased jumbo loan ceiling of $729,500 through 2010.
On a more somber note, the delinquency rate for California jumbo loans has shot up from 4.1% to 11.3% in the past year alone, since higher-tier homes are never immune to turmoil in the real estate market. Jumbo loans continue to be a headache for risk-averse lenders, but some are dealing with the problem in an economically eerie and all too familiar way: package delinquent jumbo loans and sell them to investors in the asset-backed securities market.
first tuesday take: The Federal Reserve’s (Fed) purchase of loans over the past year is the primary reason for this jumbo loan rate drop – not action in the open market. As the Fed begins withdrawing its support of the mortgage loan market this month (March 2010), rates may creep back up – but only if loan applications pick up among homebuyers, which does not appear likely. California is going into the flat stage of the recovery. For now, reduced home pricing combined with the relaxed down payment requirements and low jumbo loan interest rates will allow mid-tier homebuyers to move up and into in larger homes, a good thing for everyone involved.
The increased delinquency rate for jumbo loans is no surprise. Many extravagantly expensive homes were bought during the Milennium Boom with adjustable rate mortgages (ARMs). In 2010 and 2011, the 5-year ARMs made popular between 2005 and 2006 will re-adjust upward, giving the boot to high-end homeowners lured into a bad loan by deliberately misleading teaser rates. The uptick in jumbo loan delinquency is only the start, as the wealthy run out of savings and begin to understand that no location or type of property is immune to the effects of a real estate recession. [For more information on trends in upper tier housing, see the February 2010 first tuesday article, The “frugal aesthetic” pulls down sales of million-dollar homes and the November 2009 first tuesday article, Defaults increase in high-end ZIP codes.]