A few weeks ago I blogged about the need for help in the jumbo mortgage market and I’m here again to expound on the reasons why:
#1 – Jumbo Mortgages are Illiquid Assets Right Now
The secondary market for jumbo loans has largely dried up, which has reduced availability, tightened debt-to-income (DTI) and loan-to-value (LTV) ratios, and increased the interest rates on these loans. None of this helps the demand for or sale of housing. Adding liquidity to this market would spur sales and increased sales of real estate has ancillary benefits for the economy in terms of consumer spending. Government intervention can fix a broken market until such time as normal activity and liquidity comes back. At that time the need for government participation in jumbo mortgages could be re-evaluated.
#2 – Jumbo Mortgages are not Just a Niche Product for the Ultra-Rich
Large proportions of the homes in California, Florida and New York are in the jumbo price point because of the much higher cost of living. The Regional MLS of Minnesota (covering the greater Minneapolis/St. Paul region) reports 2600+ sales over $500,000 in 2008 and 3600+ listings active today. Homes priced over $500,000 are likely candidates for jumbo mortgages as conventional loans max at $417,000.
#3 – Having Fannie Mae and Freddie Mac Purchase Jumbo Mortgages Would Free up Billions for Mortgage and Business Lending
Since banks can’t find anyone willing to buy jumbo mortgages right now, they have to hold those loans “in-house” for now… which means that they cannot lend that money out to anyone else. In the past, banks have been able to package these loans and resell them in the market (mortgage-backed securities (MBSs) and Collatoralized Debt Obligations (CDOs) are the common terms for this and while these are also the financial instruments that have caused so much pain in the financial industry, it was in how they were rated and put together, not the practice itself, that caused the problems.
Of the 2600+ sales over $500,000 that occurred in this market last year, the total sales price was just over $2 Billion. That’s a huge dollar amount. Now even though many of those sales probably did not need financing or were only partially financed and done using conventional financing, I think it would be very safe to say that half that amount, $1 Billion, was financed using jumbo mortgages that banks cannot resell in the current market… that means there was $1 Billion that banks couldn’t re-loan out to other consumers or businesses.
#4 – Expanding Fannie Mae and Freddie Mac’s Purchasing to Include Jumbo Mortgages Doesn’t Cost the Country Money
Fannie Mae and Freddie Mac right now ARE using government monies to help stay afloat in this time of crisis but when mortgage risk is properly priced and properly managed, as it was for decades, the business of buying and holding mortgages is quite a good business. While Fannie & Freddie would need the cash right now to purchase the jumbo loans, that money would almost certainly come back to the US Treasury after the housing market and economy have started to grow again, so this would be a LOAN instead of a GIFT.
Adding Fannie Mae and Freddie Mac as buyers of these mortgages would bring down the interest rate of them as it did with conventional mortgages, which dropped almost a full percentage point in interest rates when the government stepped in to help Fannie and Freddie buy more loans. This is because the rates were artificially high due to slack demand and once that demand came back, the rates adjusted accordingly. It is very likely we could see the same thing in the jumbo market, which would make higher-priced homes more affordable and bring more buyers forward who have been sitting on the sidelines due to the currently unattractive jumbo mortgage rates. This would spur even more sales but because it is based off of basic market principles, I don’t see this as an artificial inflation of the housing market.
