An important article in Market Watch this weekend focuses on the still-hurting jumbo loan market is beginning to impact the California housing market. In parts of California (like Orange County) nearly 50% of all mortgages written are jumbo home loans (loan amounts north of $417,000). In San Francisco more than 60% of loans are of the jumbo variety. Lack of access to these loans has in part led to a huge drop off in home purchases in the state; and puts downward pressure on prices as home owners can no longer qualify for huge loan amounts.
Data shows that the jumbo market, which traditionally has an interest rate spread above conforming rates of .25%, is currently about .75% above conforming rates. Additionally, jumbo loan qualification has become more stringent, as lenders have eliminated stated income loan types and now require proof of income and assets before qualifying borrowers for large loan amounts. These two changes have made homes in the most-popular California areas unaffordable to potential home buyers.
Last week, the average rate for a 30-year fixed jumbo loan was 7.04%, while conventional loans were at 6.31%. The usual spread between the two loans is around a quarter percentage point, McBride said. In August, the spread was a full percentage point, so there’s been some progress.
If the jumbo-mortgage segment doesn’t bounce back, home sales will slow even more than they have and prices could continue to fall. Especially in high-cost areas such as California, a well-functioning jumbo market is essential if the housing market is to stabilize and eventually head up again.
The effect is compounded when you look at the decimation of the Alt-A market, which with jumbos, represents 40% of last year’s home loan market.
Along with the collapse of the subprime and Alt-A segments of the mortgage business, which together accounted for about 40% of loans last year, nearly half of the mortgage market remains paralyzed.
Crawford said Alt-A loans are being written at about a third of the pace of six months ago, and subprime originations have plunged 90%.
How will this affect the California market? With middle-class folks who were acquiring these jumbo loans using ‘afforability options’ such as interest only and negative amortization features out of the game most analysts are looking for a correction of 35-40% from the current peak of housing.
In the first six months of the year, 31% of all homes purchased in California had an interest-only payment option loan compared with 9% nationally, according to First America. For loans in California that weren’t prime conforming, 57% had an interest-only feature, and 9% were negatively amortizing.
Now, any loan with an “affordability product,” whether it’s to a prime or subprime borrower, isn’t getting written.
In a recent research note, analysts at Goldman Sachs said they believed these loans pushed California home prices to levels 35% to 40% higher than justified by other fundamentals. “We expect home prices to return to normalized levels,” wrote James Fotheringham and his colleagues at Goldman.
As the article concludes this change would mean the erasing of more than $2 trillion in home owner ‘wealth’ from the state. I hope this sobering reality wakes up those who continue to call bloggers such as myself a chicken little using the preposterous argument that subprime foreclosures are a drop in the bucket compared to the overall housing market. Those that continue to deny the undeniable need to rework their counter-arguments - pronto.
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