In contrast to jumbo home loans, loans for jumbo elephants are surprisingly easy to get.
The jumbo mortgage market was battered during the recession. While jumbo interest rates are extremely low compared to previous levels, it is also historically difficult to get a jumbo mortgage. The luxury home market was the subject of much speculation during the bubble years, and values crashed during the recession. Defaults on luxury homes made risk-averse lenders reluctant to issue large loans they would be forced to hold in their portfolios. Even those with pristine credit and ample income found it difficult to get a jumbo loan. All this may be changing soon.
Citigroup, JP Morgan Chase, and Redwood Trust (a REIT that focuses on jumbo mortgage assets) have partnered to sell $222 million worth of jumbo mortgage-backed securities (MBS). This would be the first private sale of such securities in over two years.
Private sales of MBS used to be common place, but since the housing collapse the mortgage industry has sold mortgages almost exclusively to the government sponsored entities (GSEs) Fannie Mae and Freddie Mac. The GSEs are prohibited by law from purchasing mortgages over $417,000 (although the limit goes up to $729,750 in some locations). As a result, lenders were forced to keep loans in their portfolios. As a result of the increased risk these lenders charge higher interest rates on jumbo mortgages.
If the sale of these securities is successful, it could prompt additional similar sales. Greg McBride of Bankrate.com commented: “Increasing investor appetite for bonds backed by large mortgages will help bring rates lower”. Lower jumbo mortgage rates and the increased availability of jumbo loans would be greatly beneficial to the luxury home market, which is still floundering.
The sale demonstrates how far credit markets have rebounded in recent years. The increased demand for such bonds can be at least partially attributed to the improving economy and the Federal Reserve’s purchase of $1.25 trillion worth of MBS.
How do you feel about the jumbo mortgage market? Share your opinion in the comments section below. Check back to this space for future developments in the jumbo mortgage sector.
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