The State of Jumbo Lending

After the mortgage meltdown, the availability of jumbo
loans has been vastly diminished.

Jumbo loans have traditionally been defined as those
above the FNMA/FHLMC conforming limit of $417,000.

In 2008 and 2009, Congress has allowed for FNMA and
FHLMC to purchase what are defined as "high-balance
conforming loans". The maximum loan amount varies
from county to county, and currently in San Diego
the limit is $697,500 for a single-family home.

Before Congress created this category, loans above
the $417,000 limit were usually funded through lenders
who packaged them into mortgage-backed securities (MBS).
Investors on Wall Street would buy into these pooled
mortgages so that they could obtain a higher rate of
return than Treasury bills, as an example.

One of the biggest problems with the MBS pools was that
investors were told that they were investing in pools of
loans that were underwritten to a high standard. When
the mortgage market began to unravel, the investors
realized that they had actually purchased into pools
that contained lesser quality loans that went into
default at an alarming pace.

Based on that experience, investors through Wall Street
have abandoned their interest in buying into newly
created MBS pools. They suffered losses because they
discovered too late that they could not trust the ratings
that were provided to them as an inducement to purchase
into the MBS pool.

We have had a three-tier lending system in place through
2009:

1. Conforming loans - those sold to FNMA and FHLMC with
a maximum loan limit of $417,000 for a single-family
home.

2. High-balance conforming loans - eligible to be sold to
FNMA and FHLMC up to a maximum of $697,500 for
a single-family home in San Diego.

Currently, Congress has authorized this only through
the end of 2009. If it is to continue into 2010, they
will need to enact legislation for that to happen.

As a reminder, Congress failed to continue it at the
end of 2008, re-enacted it in early 2009, and by the
time we were given the guidelines and authorization
to create these loans again, we had lost about 4-5
months to that process.

3. Jumbo loans - for the most part, those loans above
$697,500. These loans are either created for the
lender's own portfolio, or are sold on the secondary
mortgage market, which is not as active as it once was.

So, where are we headed going into 2010?

First, if you have need for a loan between $417,000 and
$697,500 (in San Diego), you would be wise to push toward
getting it closed in 2009. As of this writing, there is
no guarantee that that category will continue into 2010.
I would find it hard to believe that the government would
let the housing industry flounder while they are still
seeking an economic recovery, but we are talking about
the government here.

Second, recognize that there are fewer lenders than there
was a few years ago. This means that they can dictate
the terms of what will be offered to the public (with
encouragement by the federal regulators). They are
extremely risk-averse right now, and may continue on
this path for the foreseeable future.

The reality is that more than half the mortgages being
made in the US are made by Wells Fargo, JP Morgan/Chase
and Bank of America. Most of these loans are in the
conforming and high-balance conforming categories.

The US government (read: taxpayers) is standing behind
about 85% of the new loans being created in the last
couple of years.

Third, there is a real possibility that we may have
only a two-tier system in 2010. The conforming loans
should continue as we have known them. The high-balance
conforming loans may become a thing of the past. And
the second tier of jumbo loans (which would then be
defined as those above $417,000), would enjoy limited
availability, strict underwriting, and pricing models
that ensure profit to the lenders.

It is never too early to start planning. If you anti-
cipate a need for a loan above $417,000 going into
2010, please contact me and we can strategize about how
to meet your goals.