The jumbo loan market, once a dominant force in mortgages, is a shadow of its former self, and with the Dodd-Frank legislation pending, some are wondering when the super-sized lending option will make a true return to the housing market.
As reported by Justin T. Hilley of HousingWire in a vast, far-reaching story, jumbo loans are 5 percent of the mortgage market in 2012, a far cry from the 50 percent it comprised in 2006; and with interest rates so low, analysts worry there is no entry point for the loan in today's market.
Christopher Whalen, a senior managing director at Tangent Capital Partners, said in a Bloomberg Television interview in April that the lack of financing has been particularly troubling for the more expensive markets in the U.S.
“There’s no financing,” he said. “In the New York area there is no financing available above $1 million dollars ... What that means is the private label jumbo market is gone and what’s on the books is running off and we are not replacing it. As long as the Fed keeps rates at zero, there is not enough spread to bring investors back into the market.”
If the Fed were to raise interest rates to 0.5 percent, Whalen suggests, the jumbo market could see a reasonable change, though the Fed has indicated in recent meetings that it intends to keep the much-watched Federal Funds Rate as the zero percent mark for at least the next year, if not the next two. But as Hilley points out, the main government GSEs – Fannie Mae, Freddie Mac and Ginnie Mae – have funded more than 95 percent of the mortgage market since the financial crisis began in 2007, and none of the three institutes guarantee jumbo loans.
Also worth considering, Hilley writes, is the Dodd-Frank bill, which includes the highly controversial qualified mortgage rule that could alter, in a transformative way, how lenders judge the borrower's ability to repay his or her loan – and nowhere will that question be more considered than for loans in excess of $800,000, as jumbo loans are.
Just a couple weeks ago, in fact, representatives from 33 lobbying group sent a letter to the Consumer Financial Protection Bureau, the agency charged with defining qualified mortgages, that stated their grievances with the rule, especially a measure that would require a 20 percent payment for the mortgage to be deemed qualified.
And all the while, home prices remain a foreground issue, especially in light of the rise in strategic defaults, which, Hilley writes, could rise further in the face of deepening negative equity in the jumbo markets. Though Hilley cites optimistic analysis by Barclays Capital on strategic defaults, which stated that as prices begin appreciating once again in 2013, strategic defaults will decline, the lending community remains watchful of the default strategy. A FICO survey from April found nearly half of lenders expect strategic defaults to increase from 2011 to 2012.