John Walsh is founder and president of Total Mortgage Services
, a direct mortgage lender and broker based in Milford, Conn. For this edition of In This Corner
, Walsh gives his take on the jumbo loan market and the limit restrictions imposed across the country.
HousingWire recently spoke with an analyst who said jumbo loans are now performing similarly to the subprime market during the housing bubble. The delinquency rate for this type of mortgage is becoming abnormally high. How does this compare to your experience in the marketplace?
There's been a large loss in value in the jumbo market that has to do with a number of factors: the loss of liquidity on the jumbo side and the fact that there are fewer jumbo outlets has put further pressure on the jumbo housing market. I think that's the reason why there are troubles in that sector. As far as a percentage decline in value, the jumbo market seems to have been hit extremely hard which has contributed to the performance on those loans — a lot of those jumbo loans are underwater.
That being said, prices have gotten to somewhere near a low. With the mortgages that we're giving out today, the loan-to-value requirements are a lot steeper, the credit score requirements are a lot steeper, the debt-to-income requirements are a lot more stringent. So I think the jumbo loans being written today as opposed to the ones written even as little as six months ago or a year ago, are going to perform significantly better. That's why you're beginning to see an ease on the jumbo side of loans.
There's also a lot of legacy jumbo problems which I think is just a function of the value of homes. There was a lot of no income (documentation) loans that were done on jumbo borrowers — that seemed to be the way a lot of the jumbo loans were done. A lot of places did no income option ARMs. So a lot of those problems, that's what you're seeing now from a legacy side of things. Going forward, the loans that are being written today are significantly better credit risks. That's why you're beginning to see some liquidity in the jumbo market.
As far as the demand for jumbo loans, where do you see most of the demand coming from? What kind of loans are these?
We don't really do commercial lending, so it's all residential lending on the jumbo side. The jumbo side is not really regional, there's just more people calling about them these days. I would say demand is up at least 25% over the past couple of months. We're beginning to refinance some of our customers from two, three, four years ago that got really good jumbo mortgage rates, but because the rates have come down so much, they're beginning to come into that area where a refinance makes sense. We have seen a fairly significant uptick in the jumbo refinances recently.
You mentioned in a statement that you believe conforming loan limits should be raised across the country, not just in "high-cost areas." What do you mean high-cost areas? How would this change affect the market?
There's a conforming jumbo now, so in certain areas of the country you can go and get virtually the same prices as a conforming loan and get the loan to go to either Fannie Mae or Freddie Mac. Normally the conforming loan limit is $417,000, but in certain areas you can go up to $729,750 as a mortgage amount. That's only in 20 metropolitan areas. So even though you're in one town, where you may only be able to go up to $650,000, in another town the limit is $729,000. So it varies from ZIP code to ZIP code. My thought is you should expand that increased conforming loan limit countrywide because a lot of people fall between $417,000 and $729,750.
It would put a lot more people in the purchase market that wouldn't necessarily qualify under the jumbo program, but may qualify under this particular program. You also bring FHA into the possibility, which is 3.5% down up to $729,750. I think it would expand a ton of potential, not only buyers and a lot more purchases in the range $417,00 to $729,750, but also allow a lot of people to refinance and take advantage of these unbelievably, historically low rates.
A lot of people just don't qualify based on their loan-to-value; a lot of people have lost so much equity they can't capitalize on these low rates. And if all these people have the ability to refinance, you're looking at a lot of people saving money, a lot more money being pumped into the economy from a refinancing perspective. From a purchasing perspective, obviously when people buy a home they hire more contractors and go to Home Depot more. The good things that happen when people buy houses will happen and spur the purchase market even more all across the country; not in just these defined areas.
I think that could be a great thing on top of all the things the government is trying to do. It's not like the short sale refinance program where they're actually going to subsidize the write down or the mortgages. This is just you're taking on a larger loan size. I think it's a great time because the underwriting standards have gotten so much more stringent these days you're getting a lot more qualified borrowers.
Why hasn't the government already put in place some policy to deal with jumbo loans?
I'm sure there's a rationale as to why they only did it in pocket areas. I think they did it upon median income in particular areas. I sort of understand why they did it, but my philosophy in that area is this: just because you live in Fairfield, Conn., you have the ability to take advantage of this program. But if you live in Omaha, Neb., and you have a loan amount that meets the value of the home and you still have to meet the same underwriting guidelines, why can't you, in Nebraska, take advantage of that particular program? Again to spur more purchase activity and also to take advantage of lower rates for the ability to refinance and put more money back into the economy.
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