Jumbo loans are making a comeback in California. Although jumbo lending nationally remains far below 2007 levels, jumbo mortgage lenders increased the dollar amount of jumbo loans originated during the second quarter of 2010 for a 20% increase from Q1 of this year.

Wells Fargo and JPMorgan Chase have both recently increased their jumbo loan output. Chase originated 146.2% more jumbo loans in the first two quarters of 2010 than it did during the same period in 2009 (a somewhat inflated report given loan availability was nil in the first half of 2009 and thus not a fully reliable reference point). Wells Fargo reported a slightly more modest 47.5% increase in jumbo loan originations in the first half of 2010 compared to the same period a year ago.

This increase from very low origination rates of the year earlier comes with the requisite reminder that underwriting procedures are more robust than ever and newly originated jumbo loans are only being made to individuals who can clearly demonstrate their ability to make their mortgage payments — self-employed “liar loans” are an item of the immediate past.

One reason for the increased demand in the jumbo loan market is that interest rates are historically low. Due to aggressive actions by the Federal Reserve (the Fed) in the mortgage-backed bond (MBB) market during the past two years, and again now with the second wave of lower rates on the way (which have been expected for months), all loans, not just jumbos, are more attainable.

The average jumbo rate through October 2010 was 5.11%, down from 6.14% in January of this year. Qualified borrowers can obtain a jumbo adjustable rate mortgage (ARM) with an introductory rate in the 3% range. [For more information on jumbo loan interest rates, the March 2010 first tuesday article, Jumbo mortgage rates are now more attractive.]

The total volume of jumbo loans still only comprised 5% of all mortgages made in 2009 and 2010 — the historical average is 18%. This is a much better reference point for determining if lenders are lending again and indicates they are operating at about 30%, which is far below the boom years of the 2000s. But with an increase in demand and more cash in lenders’ coffers, the return of the McMansion may be nigh.     

first tuesday take: An increase in jumbo loan originations is good news for California real estate brokers and agents as it indicates the huge backlog of high-tier home inventory in California, mostly located in the coastal regions, is starting to move. However, this good news is tempered by the fact that high-tier home sales are more or less the order of the day in the California real estate market, meaning business is not starting to boom (except for foreclosures), it is just slowly lumbering back to normal, as is every other sector of the real estate market.

High-tier home sales in Southern California represented 18% of September 2010 resales, up from 15% one year prior.  Northern California, which carries a higher concentration of high-tier home prices, saw a substantial increase in high-tier home sales totaling 34% of resales in September 2010, up from 24% one year ago. [For more information on California home sales data, see the November 2010 first tuesday article, September home sales volume.]

Although this means more opportunities for larger broker fees, California real estate agents and brokers will have to work that much harder to secure a sale with a buyer requiring a jumbo loan. Data reflecting increased jumbo loan originations does not mean jumbo loans are any easier to acquire. We know from steady California unemployment numbers and small business income that buyers are not earning much more than they were in 2009 (and comparatively much less than they were in super-heated Boom years).  Also, lenders are not backing off on their stricter underwriting standards (which bodes well for long-term real estate market stability). [For more information on lender underwriting protocol, see the May 2010 first tuesday article, Buyer purchasing power.]

As the economy struggles through the growing pains of this recovery period, high-tier home sales volume will continue to rise somewhat, with jumbo loan originations increasing in turn. Hopefully the buyers will be able to get fixed rate mortgages (FRMs), rather than these hybrid ARMs with the three- or five-year roll over (and play dead) feature.

Buyers and lenders alike are becoming more confident and positive growth in high-tier home sales, particularly in the Bay area, is a reflection of the psychological balancing act currently occurring in the California real estate market. However, the jumbo loan market cannot return to normal until bond markets regenerate and lenders can start selling jumbo loans on the bond market at healthy margins again.

Once this occurs, interest rates will rise — beware the ARM. Have we learned nothing from the past decade?

Re: “The jumbo mortgage comeback” from the Wall Street Journal