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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San Francisco Rent versus Buying? In Northern California you’d be Foolish to Buy. Examining the Bay Area Housing Market and Opportunity Cost of Buying a Home.
There are few housing markets in the world that rival the ups and downs of California. You would be hard pressed to find any other area with a proliferation of mortgages like option ARMs that defy any sensible notion of financial prudence. Yet many areas in California like the Central Valley for example have corrected and corrected hard in this housing bubble burst. But there are other areas that not only have not busted but have actually increased in price. Many areas of California are still enjoying the fruits of the housing bubble. No other area in California is more over priced than the Bay Area. Today we’ll look at San Francisco County to highlight some of the issues in home prices.
In California there is a strong debate between buying and renting. What isn’t being examined is that there is an opportunity cost to buying a home. That is, you can put the money saved from not buying into other investments. This is an important issue because it highlights the true cost of homeownership. First let us look at some information from the Bay Area:
I know to some of you not from California the above prices must seem like some absurd joke but these are in fact home prices in California. With prices like this you can understand why many people leveraged their finances with questionable mortgages simply to squeeze into a property. If you look at some areas like Contra Costa County prices have corrected from their peaks in 2007. Yet San Francisco County is actually up and up by a bit from last year. This is the county we will focus on to highlight the actual cost of buying a home.
Since the median price is $650,000 I tried to find a home in San Francisco that met this number. I went ahead and pulled up a home in the 94107 area. The median price for SOMA is $647,500 so this will be a good area to look at. Let us dig up a home that hits that mark:
The above home is listed as a “2 br / 1 ba” home and is listed at 782 square feet. The list price is $650,000. Yes, this is actually what $650,000 will buy you TODAY in this area. This is after the entire housing market crashing in California by the way. Let us now try to find a similar rental in this area:
A 2 bedroom (how do they get 2 bedrooms out of 782 square feet?) will rent for $2,800 in this area. You can find a 1 bedroom at 782 square feet for $2,500 but we’ll stick to these metrics for our calculations. Now, let us assume we purchase this home with 10 percent down:
Source: Dinkytown.net
This is where the number crunching becomes important. We are coming in with 10 percent down ($65,000). Our monthly payment should run about $4,632 per month. The after tax saving net payment comes out to be $3,764. Now most who argue for buying will stop right here. But that is a mistake. Remember that you are putting $65,000 down plus other costs to buy. You will also pay $1,000 to $1,800 more per month when buying depending on how your tax structure is setup. That is money that can be going into other investments. That is the opportunity cost here and what is rarely examined. Now, let us assume a 7 percent return on other investments and run the numbers:
The above chart is crucial. You’ll notice that after year 1 you will already have $81,437 from your investment (down payment, closing costs, plus net PITI minus rent payment invested). Keep in mind we are assuming a low rate of housing appreciation since incomes are now stagnant in California and home price in this area is way too high already. Prices may actually go down as we now know. So assuming these factors you can see that it will take you 13 years to breakeven. That means you better be sure you are planning on staying put in this place for 13 years and are able to cover that mortgage for that long.
Opportunity cost is important because it highlights the complexities of buying a home beyond simple catchphrases. San Francisco is still exhibiting bubble like prices. In the above case it would make sense to rent.
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California Housing Inventory – 3.8 Months of Inventory if we only look at Public Data. The Financial Math behind California Home Prices and Artificially Low Inventory. Distress Inventory Still Dominating Market.
For a state like California getting an accurate figure on total inventory is always a challenge just because of the size of the state. Throw in the large amount of inventory that is held off view from the public and it is hard to get an accurate figure of what is out there. As of today, if we only go by public data available the state currently has 3.8 months of inventory. Anything below 6 months is considered healthy but this is hard to believe given the state has an unemployment rate upwards of 12 percent and if we look at underemployment we arrive at a figure above 21 percent. Plus, the state is mired with lingering toxic mortgages like option ARMs that are now reaching default rates that are higher than subprime loans. Anyone assuming that California has a low amount of inventory because housing is healthy is missing the bigger picture. The inventory is low for other reasons.
First, let us look at the snapshot provided by the California Association of Realtors:
From this data, we see that current unsold inventory is at 3.8 months. But how is this figure computed? First, let us run the MLS numbers for all major metro areas in the state:
The above is only a snapshot of all areas but we will find some 157,000 homes listed on the MLS inventory. Next, we can go to the monthly home sale figure and get an estimate of monthly inventory:
December 2009 California Home Sales: 41,837
At this point it is easy to get the final figure of unsold inventory:
157,979 / 41,837 = 3.77 months of inventory
Now at first glance, this number is highly deceptive because it would otherwise show a healthy market. Simply looking at the 3.8 figure makes you assume that the market is moving at a relatively great pace. It is not. Foreclosures are dominating markets. Take a look at San Diego for example:
If we look above, we find that 3,152 homes are listed on the MLS for San Diego that are non-distress properties. But let us factor in bank owned foreclosures, homes scheduled for auction and default notices:
And there you find why the actual overall figures are so misleading. If we include the MLS non-distress plus the other distress data we find that 9,662 homes are on the market. This now includes foreclosure sales but also the growing trend of short sales. The distress inventory is 200 percent larger than the non-distress inventory. In other words, the market is dominated by people unable to pay their mortgage or many who are deciding to strategically default. It is rather apparent why the market is in such deep trouble. Much of the recent home sale volume has come at the lower end but also from investors.
Now let us go back to those 41,837 California sales for December. Of those sales, 41 percent or 17,153 homes were foreclosure resales. In other words only 24,685 homes sold that were non-distressed. This kind of data is not normal:
To put the above in perspective, in all of 2006 California recorded approximately 11,400 foreclosures. So last month alone, those 17,153 foreclosure re-sales surpassed the entire calendar year of 2006! Does that really sound like a healthy market? And in 2009 the state saw 400,000 homes that received a notice of default. A large number of these homes haven’t even made their way to the MLS. So the pipeline is full of distress inventory. In other words, the headline inventory number is highly deceptive so buyer beware.
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