Jumbo Home Loans Weighing Down on Banks and Investors
It wasn't all that long ago when the biggest banks in the country – J.P. Morgan Chase, Bank of America and Wells Fargo among them – originated hundreds of millions of dollars in jumbo loans.
These hefty jumbo loans exceed the Fannie Mae and Freddie Mac conforming loan limit, currently $417,000 in the Chicago Metro Area, and as high as $625,000 in some high-priced metro areas such as San Francisco and New York City.
The Wall Street Journal recently reported that during the first nine months of last year, these large banks accounted for nearly half of all jumbo mortgage loans written in the United States. They range in value from an average of $750,000 to an excess of several million dollars in some cases. According to mortgage-data research firm LPS Applied Analytics, last December roughly 6.9 percent of all prime jumbo loans were at least 90 days in arrears - up from a comparative-paltry 2.6 percent at the end of 2007, the Journal reported.
By way of comparison, only 2.1 percent of non-jumbo prime loans were 90 days or more delinquent as of the end of December – still up sharply from the 0.8 percent non-jumbo delinquency in December 2007.
Hefty load to handle
The struggling U.S. Economy, ripe with slow-to-sell homes and high levels of unemployment across all salary and age brackets, is fueling increased default rates among homeowners. Jumbo loans add increased pressure to a lender's bottom line due to their larger loan values.
With the housing market down, fewer lenders today are offering jumbo loans. While Chase still offers these types of loans, they and other lenders still carrying jumbo loan products charge far-higher interest rates and fees than for lower-level conforming mortgages. According to financial publisher HSH Associates, average rates on 30-year fixed jumbo loans were 6.87 percent last week, compared to an average of 5.34 percent for lower-value conforming home mortgages.
Credit Suisse estimates nearly 25 percent of prime jumbo mortgage loans currently exceed the value of the homes they are backing. Given the lender's expectation of additional price declines of 15 percent over the next two years, that 'under water' percentage could increase to almost 42 percent.
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