Jumbo Mortgage Delinquencies Soar as High-End Home Inventory Builds

Delinquencies on jumbo mortgages nearly tripled to 9.2% in December 2009 compared to the 3.2% rate December 2008 as the inventory of expensive homes continues to rise, according to a report from Fitch Ratings. This shouldn't be much of a surprise to the banks that allowed option adjustable-rate mortgages and interest-only mortgages to be concentrated in the high-cost housing market.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% Interest-only loans were commonly used to purchase homes valued at $750,000 or more. These exotic loans allowed borrowers to postpone making principle payments for three, five or seven years, but now those interest-only periods are ending, and the loans are beginning to reset to much higher payments.

At the same time, many of the white-collar workers who took the loans are facing job losses or cuts in their cash bonuses. If Wall Street bonuses shift from predominately cash to higher portions of stock that must be held for several years, the high-end housing market likely will face an even big shock.

Many of these wealthier homeowners may have planned to refinance their option adjustable-rate or interest-only loans before the resets, but they can't do so because their homes are now worth less than the value of the mortgage. If they can't afford their new, higher payments, default is the likely option.

Five States Feel the Most Pain

Making matters worse, the supply of unsold homes on the market priced above $750,000 continues to climb. JPMorgan Chase analysts estimate that it will take until at least 2012 for this market to recover. They also predict that peak-to-trough declines could surpass 60% in the high end, compared to 40% for the rest of the market.

Two-thirds of prime jumbo loans are concentrated in five states: California, New York, Florida, Virginia and New Jersey. The rates of prime jumbo loans that are 60 days or more delinquent include: California, 10.8%, up from 3.5% in 2008; New York, 5.8%, up from 1.8%; Florida, 16%, up from 7.3%; Virginia, 5.4%, up from 2.3%; and New Jersey, 7.1%, up from 2.3%.

California has the largest share of the jumbo marketplace with 44%. The next highest share is in New York with 7%, followed by Florida with 6%, Virginia with 5% and New Jersey with 4%.

Jumbo mortgage borrowers face much higher interest rates and lending standards as well. Most banks that make jumbo loans offer them at interest rates that are 1% or more higher than the rates for loans that don't exceed the limits of Fannie Mae and Freddie Mac, which range from $417,000 in most of the country to as high as $729,750 in the most expensive housing markets. In addition to higher interest rates, banks are looking for down payments of at least 20% to 30% or more. This not only makes it harder to refinance; it also makes it harder to find a buyer for a home one can no longer afford.

Luckily for the banks, jumbo loans are not a major part of their portfolios. In the first quarter of 2009, homes priced over $750,000 accounted for only 2.3% of all sales, compared to 4.4% at the top of the housing market in 2007.
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