Jumbo Loans: Will the World End If They Go Away?

jumbo loansFrom the perspective of lenders, come this fall, writing jumbo mortgages without the federal government backing them is akin to walking a tightrope without a safety net. And the widespread prediction is that they just won't do it.

Some analysts predict that if the government no longer covers the risk of default, private lenders just won't write the loans -- resulting in only cash buyers being able to buy luxury homes -- and the high-end housing market will collapse.

Will the gilded sky really start falling? For most of America, this change is a big ho-hum.
Only 1.5 percent of all real estate transactions in March were of homes costing $1 million or more. Sales costing $750,000 to $1 million were another 1.5 percent. So why are we wringing our hands over a measly 3 percent of home sales when the other 97 percent of people buying homes won't be affected?

The short answer is that in high-cost states like California -- where 20 percent of homeowners carry jumbo loans -- and New York, New Jersey, Connecticut and Massachusetts are going to take a huge hit. If the housing market drives the economy, is the nation really prepared to watch its head fall to the guillotine?

So far, sales in the luxury end of the market have been doing just swell (or at least better than the rest of the market). The National Association of Realtors, just concluding its mid-year meeting where the potential loss of jumbo-loan backing was a dominant discussion topic, says that sales of $1-million-plus are 5.1 percent higher than a year ago, and sales of $750,000-to-$1-million are 0.8 percent above a year ago.

"Overall sales were 6.3 percent below March 2010, so there's been a real recovery in the upper end with increased access to jumbos and declining jumbo loan rates," said Walt Molony, spokesman for NAR. And NAR doesn't want that to go away.

We'd also note that all-cash sales were at a record high of 35 percent of the market share in March, up from 27 percent. NAR hasn't broken that out by price range but, anecdotally, the lion's share of cash buyers are investors snapping up homes priced at under $100,000.

Molony said, "Anecdotally we know there is some upper-end cash activity given the full recovery in the stock market. In addition, some parents are buying homes for their children with cash and providing them personal loans which offer a better return than bank accounts or CDs."

Federal agencies, for the past three years, have backed new mortgages up to $729,750. That's worked to make lenders be a little looser in writing those loans since they don't bear the full risk of them. But now the political sentiment on both sides of the aisle is that taxpayers shouldn't have to bail out properties that are well above the national average home price. It's time to see if the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans, stricter qualification standards and fewer potential buyers for more expensive homes.

"There is no entitlement to living in a home that costs $750,000," said Michael S. Barr, a former assistant Treasury secretary, to The New York Times. It's a sentiment shared by many.

Last year, the feds backed nine out of 10 new mortgages and is eating the losses from bad loans. Fannie Mae last week said that it needed an additional $6.2 billion in aid, bringing the total cost of its rescue plan to nearly $100 billion.

But the government is finding that exiting the mortgage business is pretty difficult. NAR's Molony says the private mortgage industry isn't yet equipped to take on jumbo loans without the government's support. "If more expensive homes were entirely dependent on private financing, you could see a real crisis in areas like California when capital disappears again. There would be a universal impact, with the upper end pretty much locked as it was two years ago when jumbos were essentially unavailable."

The fallout already is being felt. Home sellers are concerned that come autumn, the pool of qualified buyers will shrink and push listing prices down. Buyers are anticipating less competition in the market for homes, but also higher lending standard hoops to jump through.

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