Jumbo mortgages to remain steady after conforming loan limit drop
The elevated conforming loan limit on mortgages guaranteed or insured by the government expired Saturday, but the only issuer of private-label jumbo securities since the crash said the largest banks will still move forward. Mike McMahon, managing director at Redwood Trust (RWT), said the same banks that originated and retained mortgages higher than the previous $729,000 cap will still be writing loans above the new $625,500 ceiling. Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), and Citigroup (C) originated $14 billion of these loans in the first quarter, and McMahon doesn't see that changing. "They will continue to make such loans," McMahon said. "The world will not come to an end." To support a crippled mortgage-finance market in 2008, Congress increased the conforming loan limit for Fannie Mae, Freddie Mac, and Federal Housing Administration loans to a local cap of 125% of median home prices along with the overall ceiling of $729,000 in the most expensive neighborhoods. On Oct. 1, those limits dropped to 115% of local medians despite a major push from the industry and several lawmakers in the Senate and the House of Representatives. Rep. John Campbell (R-Calif.) said there will be another chance to restore the higher limits through a government-spending bill later in the year, but the Obama administration has stuck to its commitment made in February to begin weaning the market off of government support. "The administration is committed to a system in which the private market — subject to strong oversight and strong consumer and investor protections — is the primary source of mortgage credit," Treasury Secretary Timothy Geithner told the Senate Banking Committee in March. Paul Dales, senior U.S. economist at Capital Economics, said in a research note last week the drop "shouldn't be too much of a problem." Dales said only 5% of borrowers would be affected, echoing a recent study by the Federal Reserve that also found a minimal effect on new originations. The worry is over mortgage rates, down payment sizes and prices. Rates for jumbo borrowers are expected to rise without a government backing, and home prices in the most affected areas such as California and New York could be cramped down. Jaret Seiberg, a research analyst for the Washington think tank MF Global said his biggest concern regards the down payment. "Down payments on jumbo loans tend to be at least 20% compared to as little as 3.5% for FHA loans," Seiberg said, adding the effect on rates, which are already at historic lows, would be much smaller. Seiberg estimates the drop in loan limits to push rates on jumbo loans between 25 basis points and 50 bps higher. Meanwhile, the National Association of Homebuilders, which pushed Washington hard to restore the elevated limits, estimates rates could rise as high as 75 bps. "Lower mortgage limits are likely to lead to further weakness in home prices in certain high cost areas, primarily in California," Standard & Poor's analysts said in a note Monday. At ground level in California, the mood is bleak. Tom Moon, an REO broker and owner of Pacific Moon Real Estate in California, said he was desperately trying to find another home for clients, who sold their house in May, before the loan limit dropped Saturday. Many buyers in the $800,000 to $1 million range will not be able to put the 20% down, he said, especially if prices continue to fall. "They don’t have an additional $100,000 cash down payment, so they are going to have to lower their sights on their purchase price," Moon said. Still, nationally, analysts at Barclays Capital said allowing the limits to expire will do exactly what the administration intended and what Redwood is planning – just at a slower pace. "The lower loan limits may increase issuance of non-agency jumbo securities, as loans originated with balances between the old and new loan limits will no longer be eligible for agency securitizations; however, the effect is likely to be very small," BarCap analysts said in a research note released Friday. BarCap expects just 3% of mortgages in new agency MBS to fall between the old and new limits and most of these borrowers will more cash in to avoid the elevated rates. "Last but not least, non-agency securitizations will still need to compete with bank portfolios that will likely have a strong bid for higher-quality loans in these buckets," the analysts said. Write to Jon Prior. Follow him on Twitter @JonAPrior.