Jumbo Prime Loans

Jumbo prime loans are those made to borrowers with good credit histories, but which are too big to be sold to the GSEs, which have a limit of $417,000 (in some areas, $729,750). In many ways, these loans have the same problems as option ARMs, the only difference being no negative amortization.

Averaging $750,000, jumbo loans are most common in areas with high home prices like California and Florida—in other words, the areas where the bubble inflated the most and that are now suffering the greatest collapse. Also, some lenders were making jumbo loans to borrowers with FICO scores as low as 620 and calling them prime, but such loans are most certainly not prime.

There are approximately $1.0 trillion to $1.5 trillion of prime jumbo mortgages currently outstanding.

Figure 4.21 shows originations of jumbo prime mortgages by year.

Average Mortgage Origination Volume

Figure 4.21 Jumbo Prime Mortgage Origination Volume

Source: Inside Mortgage Finance, Inside Mortgage Finance Publications, Inc. Copyright 2009. Reprinted with permission.

Figure 4.21 Jumbo Prime Mortgage Origination Volume

Source: Inside Mortgage Finance, Inside Mortgage Finance Publications, Inc. Copyright 2009. Reprinted with permission.

During the bubble years, jumbo prime loans typically had a fixed interest rate, usually 1.5 percent below a 30-year fixed rate, which then reset after five, seven, or ten years (called 5/1, 7/1, or 10/1). Such loans were available to borrowers with little money down and with little or no documentation.

Mark Hanson of the Field Check Group explains what's happening to these loans today:8

Jumbo prime are high-leverage programs that allowed borrowers to buy much more home than they should have. Because jumbo prime borrowers had better credit overall, banks were very easy on the qualifying. For example, with full documentation, a 620 credit score [borrower] could get an 80% $750,000 first mortgage that allowed a 15% second [lien] on top of that for a 95% loan.

These loans typically qualified at interest-only payments. For stated income, the fee was very small, typically 0.125% in [increased interest] rate, with allowable credit scores around the 660 level. A 50% debt-to-income ratio was typical. THESE ARE NOT PRIME LOANS. This goes to show how distorted risk management became.

This entire mortgage and housing blowup is very linear. . . . subprime to Alt-A to jumbo prime then prime conventional. Home equity lines of credit blow the entire way up the chain. The defaults in jumbo prime have to do with: a) the way they were structured with longer teasers such as 5, 7, or 10 years;

  1. the high leverage allowing up to 50% debt-to-income ratios on full-doc and unlimited on stated, no ratio and no doc; [and]
  2. the massive negative equity due to median home prices falling in the biggest Jumbo regions by 25 to 70%.

Hanson then gives an example of a typical jumbo prime loan:

BUYING A $650K HOME WITH $85K PER YEAR INCOME—MOST POPULAR IN CALIFORNIA

A 5/1 interest-only [loan] at 5% . . . means that a $520,000 loan carried a payment of only $2,166 per month. Add in $650 per month for taxes and insurance, and the total is roughly $2,825.

With a 15% second [lien] of $97,500 at prime [interest rate] carrying payments of $325 per month and reasonable "other debt" at the time of $400 per month, the total payment out the door would be $3,541 approximately.

This means a household income of $7,082 per month could buy a $650,000 home with 5% down. This is not out of the realm of hourly workers or moderate-income single-worker families.

Now the same home is worth $450,000, the borrowers added debt after the loan was funded and all of their after-tax income is going out to [service the] debt each month. They can' t save a penny and are going broke just to live in this underwater house.

They can rent the same house for $2,500 per month. The best decision is to walk.

Nowadays, the same income buys a $275,000-$300,000 mortgage with 10% down. This shows why housing prices keep falling.

Interest rates also aren 't helping jumbo prime borrowers. Figure 4.22 shows that as Treasury rates have fallen, interest rates on conforming 30-year fixed-rate mortgages that can be sold to Fannie and Freddie have fallen to near all-time lows just above 5 percent, but fixed-rate jumbo mortgage rates are around 7 percent and even jumbo ARMs are at 6 percent. This 163-basis-point spread (as of late February 2009) between conforming and jumbo fixed-rate mortgages was more than six times wider than the average spread of 25 basis points from 2004 to 2007.

Finally, it's important to note that the Obama administration 's new Homeowner Affordability and Stability Plan will do little to help the majority of jumbo mortgage holders, since it doesn' t apply to any mortgages with a balance above $729,750.

Figures 4.23 and 4.24 show overall delinquencies and delinquencies by vintage for jumbo prime loans. Overall delinquencies were quite low until 2008, and the current trend is alarming.

Figure 4.24 shows jumbo prime mortgage performance by vintage. In February 2009, Standard & Poor's estimated that losses on jumbo prime loans backing 2006 securitizations will reach an average of 3.65 percent, while losses for similar 2007 bonds will hit 4.5 percent. On March 19, 2009, Moody's one-upped S&P by revising its loss projections

Figure 4.22 Mortgage Rates by Type of Loan

Source: HSH Associates, Yahoo! Finance (http://finance.yahoo.com).

Figure 4.22 Mortgage Rates by Type of Loan

Source: HSH Associates, Yahoo! Finance (http://finance.yahoo.com).

Florida Prime Delinquency Rates

Figure 4.23 Jumbo Prime Mortgage Delinquency Rate

Source: Amherst Securities, LoanPerformance.

Figure 4.23 Jumbo Prime Mortgage Delinquency Rate

Source: Amherst Securities, LoanPerformance.

2011 Vintage Mortgage Delinquencies

Months of Seasoning

Figure 4.24 Jumbo Prime Mortgage Delinquency Rate by Vintage

Source: Amherst Securities, LoanPerformance.

Months of Seasoning

Figure 4.24 Jumbo Prime Mortgage Delinquency Rate by Vintage

Source: Amherst Securities, LoanPerformance.

for RMBSs backed by jumbo prime loans, saying that it "is now projecting cumulative losses of about 1.70 percent for 2005 securitizations, 3.55 percent for 2006 securitizations, 5.05 percent for 2007 securitizations and 6.20 percent for 2008 securitizations." Meanwhile, a Goldman Sachs report estimated 4.7 percent losses and JPMorgan's analysts doubled their estimates of losses to 8 to 10 percent.9 We think overall losses will likely be in the 7 to 12 percent range—and even higher in California, for reasons best explained by Mark Hanson:10

All over the nation, especially in California, there are millions of high- value homes in which the homeowners are trapped, unable to sell due to lack of equity or refinance due to the lack of financing. I have been watching mid-to-upper-end properties in California teetering on the verge of a major fall for a year now—they have held better than the lower end, but in 2008 everything changed, as subprime loan defaults waned and higher grade defaults (Alt-A, option ARM and jumbo prime) attached to higher home values look the lead. Now the lion 's share of defaults is everything but subprime.

The higher grade default wave intensified mid-2008 and now those houses have been foreclosed upon and are coming to market fast, in large quantities. Bottom line: the mid-to-upper-end housing collapse—which has largely been avoided to date, mostly due to better borrowers coupled with higher-leverage and longer-teaser-term loan programs—is upon us.

With all of these foreclosures coming to market and very little financing available to purchase all of the high-end homes available, the supply factor is going to bring down values rapidly—and this does not even count Ma and Pa Homeowner who want to sell. Based upon what I see so far in 2009 prior to the spring and summer selling season, my best forecast is that homes with present values over $750,000 will lose at least 30% in 2009 and those currently worth over $1.5 million will likely decline even more.

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Responses

  • ermias
    Is $520000 a jumbo loan in california?
    6 years ago
  • laura lehkosuo
    What is the current delinquency rate on jumbo prime mortgages?
    6 years ago
  • Wiktor
    What is a prime jumbo morgage?
    6 years ago
  • michael
    Are jumbo loans prime loans?
    6 years ago
  • CORA
    What is a jumbo prime loan?
    6 years ago
  • jukka-pekk
    What year had the most jumbo loans?
    6 years ago
  • caiden
    Are jumbo loans being made?
    6 years ago
  • JEMIMA
    What is your average monthly mortgage origination volume?
    6 years ago
  • prisco
    Is a 30 year fixed jumbo loan going to reset?
    6 years ago
  • askalu
    What is happening to jumbo property values in california?
    6 years ago
  • reagan
    What happened to the availability of jumbo interest only loans?
    6 years ago
  • kalervo
    How much to buy a point on a 650 k loan at 5%?
    6 years ago

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