Big Loans Facing Big Problems – California Prime Jumbo Loan Defaults Rise to 11.3 Percent Putting $167 Billion in Loans in Distress. California Holds 44 Percent of Prime Jumbo Loans and 50 Percent of Option ARMs.

Most Americans will never deal with a jumbo mortgage.  With the nationwide median home price of $173,000 a mortgage of $729,750 seems like an absurdity to most people.  But in states where housing prices were climbing by leaps and bounds big mortgages were big business.  The prime jumbo residential mortgage backed security market is currently at $381 billion.  This is an area that is largely ignored in most housing talk because it impacts such a select few.  To put this in perspective the option ARM pool of mortgage backed securities outstanding is up to $189 billion.  With option ARMs we find that half of the loans find their home in California.  With prime jumbo loans the same pattern holds with 44 percent of the entire pool in California.

Let us look at a few other states as well:

Source:  Fitch Ratings

California by far holds the largest amount of jumbo loans.  Jumbo loans are risk and many times, lenders would require two appraisals before making the loan.  That was the case before the bubble but with that cast aside performance has faltered.  Jumbo loans are performing poorly with 11.3 percent now registering as being delinquent in California.  The only other state to have a worse performing track record is Florida where prime jumbo loans are in distress at a rate of 16.6 percent.  Now many might be asking why are these loans labeled as “prime” if such a large number of the pool is now performing badly?  The issue is the loan itself.  Many of these loans do not fall under conforming standards and carry higher interest rates but also, carry much larger balances.  In markets like Florida and California where prices have collapsed, many people now find themselves in negative equity positions and it might be that many borrowers are choosing to strategically default on these loans.  Or what is more likely are unable to service the actual mortgage.

It is a horrible track record that for 32 months jumbo loans delinquencies have been surging.  Fitch Ratings looked at prime jumbo residential mortgage-backed securities (RMBS) and found that for the entire pool of $381 billion 9.6 percent of loans were seriously delinquent.  To qualify for serious delinquency means being past due by 60+ days.

The jumbo mortgage market was once a good way to find financing but now with government loans making up the bulk of purchase money, jumbo loans are largely sidelined:

“(MDA DataQuick) The percentage of Southland homes sold above $500,000 last month rose to 20.2 percent of all sales, up from 16.5 percent a year earlier and the highest since it was 23.6 percent in August 2008. On average since 2000, $500,000-plus sales have made up 36.5 percent of total sales. Right before the credit crunch hit in August 2007, making larger “jumbo” mortgages more expensive and harder to obtain, $500,000-plus sales made up about 52 percent of Southland transactions.

More sales in once-dormant high-end communities helps explain last month’s year-over-year gain in the median sale price – the point where half of the homes sold for more, half for less.”

This trend has also played out in Northern California:

“Home loans for more than $417,000, the old “jumbo” limit, used to account for more than 60 percent of the Bay Area’s purchase financing. Last month it was 29.8 percent. That percentage rose from 17.1 in January 2009 to 28.7 last June. It has since remained at roughly 30 percent.”

Jumbo loans carry higher interest rates and ask for larger down payments.  In a market like California where consumers are financially strained these loans are becoming a smaller part of the market.  In fact, this is another reason why the million dollar plus market has seen a steady decline since 2005.

Million Dollar Home Sales (CA):

2005:     54,000

2009:     18,621

I put in a quote for a few jumbo 30 year loans in California and found the rate to be between 5.8 percent and 6.5 percent.  Compare this to loans under $417,000 with rates of 4.8 to 5.4 percent.  Now the rate itself is marginally different but the down payment requirement is the bigger deal.  Keep in mind that FHA insured loans will allow you to purchase a home with 3.5 percent down up to a maximum loan cap of $729,750.  Anything above that and you are looking at 20 percent down or 10 percent down with a handful of lenders.

The jumbo market is going to experience more pain in the upcoming year.  California and Florida are already showing the deep issues in this market.  Keep in mind when jumbo loans go bad that their losses will be larger because they are also larger in balance size.  A home that sold with a $4 million mortgage that is now worth $2 million is the equivalent of 20 houses that foreclose and each cost the banks $100,000.  This is another aspect of the mortgage market that got out of hand during the housing boom.

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