Jumbo Financing and the Impact on The San Diego Real Estate Market
Jumbo Financing is any financing that goes ABOVE what the "agencies" will buy or insure. This basically includes any loan larger than the FNMA and FHA loan limits. There are currently very few players in this market. These players include GMAC, Chase, BofA, Wells, Citi, and a few others with less commonly known names. The issue is that these players can no longer "securitize" and sell these mortgage loans, so the loans use up their cash. In spite of being able to charge higher rates and diligent scrutinizing of the underwriting, the investors are also trying to conserve their cash positions; liquidity is king for banks right now. These investors have (nearly) all made guideline changes just in the last few week,s indicating that their appetite for the loans is slowing. We have seen investors raise minimum FICO score requirements. Chase will not finance anyone who owns more than 4 properties. GMAC has completely eliminated programs, only to reinstate some of them the next day. Citi has priced some products so high they are effectively out of the market And so on it goes. These investors now require higher down payments and are especially cautious with their lending guidelines in "declining markets" like California. To understand the effect this will have on our market, let's look at underwriting policies. For buyers buying a property that is WITHIN the "agency" guidelines, there are very specific underwriting criteria that are used. FNMA uses an automated underwriting system (called DU for Desktop Underwriter) that is actually still fairly liberal in allowances for income and debt ratios and other specifics. FHA will also accept a DU approval for their files. A buyer buying a property within these limits can make a 3% down payment with FHA financing or a 5-10% down payment and get conventional financing. However, when we go ABOVE the "agency" limits, the rules change. Investors generally want larger down payments and higher FICO scores. Rates for borrowers borrowing over the "agency" limits are close to the 8% range for 30 year fixed rate loans while "agency" loans can be obtained for rates well under 7%.
Why is this an issue for San Diego? Here's why. The loan limits (for 1 unit) in San Diego were about $365,000 for FHA and $417,000 for conventional loans. When the economic stimulus bill passed, the limits were raised. The MAXIMUM amount was just over $729,000. A formula was used allowing 125% of the median price for an area (calculated in 2006) which yielded a maximum amount of $697,500 for San Diego. This EXPIRES at the end of the year.
Many people have seen the new housing bill and seen the number $625,000 thrown around and (in my opinion) wrongfully assuming that the new loan limit will be $625,000. However, the language of the bill indicates that the $625,000 is a new MAXIMUM and that a NEW CALCULATION will be done. The new calculation will be 115% of the 2008 median. Uh oh! The current median is about $368 for San Diego County (as of July, and we don't yet know exactly which # and which month they will use). If we assume that the $368k median holds, the new "agency" loan limit for San Diego will go DOWN to about $423,000. This means that anyone wanting to borrow OVER the $423,000 loan limit will be tied to the jumbo underwriting guidelines and pricing. Those loans do not rely on the automated systems like DU for approval and generally have tighter qualifying guidelines than the agency loans.
Certain programs have already gone away or are going away. Right now, it is VERY difficult to finance people who are self employed, who are buying certain condos, who are investors owning more than a certain # of units, etc…
The net result is that anyone trying to sell a home priced from say $500,000 to $800,000 better get it sold and closed before the end of the year. With the expensive (think 8% fixed) and limited financing options (think VERY limited) available over the conforming limits and with that limit dropping (think the low $400k range as of January 1), qualified buyers in this price range will be very few indeed!
Many thanks to our guest author, Mr.Greg Brooks Southwest area manager San Diego Mortgage Network for this enlightening post. A few our prior popular posts were:
More homeowners than ever are selling at a loss!
Another Look at the June Rise in Pending Home Sales
Home Value Loss … Homeowner Perception vs. Reality
San Diego Real Estate Market Bottom?
Reworked Subprime Loans … 40% End Up Defaulting
San Diego Real Estate … The Coming Next Wave of Foreclosures
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Why do we think jeopardizing our country’s future for short term gain is a good idea? As a whole, Americans live beyond their means and rely on….credit. You can’t expect Uncle Sam to “fix” all of your personal finance problems. Time to let the chips fall where they may… San Diego real estate
When I was buying a house about 4 years ago, you could not believe the zany loans I was offered. Interest only was big then…”all you need is to pay your interest then whatever you can afford on the principle.” Thank god I wasn’t foolish enough to do that, I’d be one of the many in foreclosure now. Cosmetic Surgeon San Diego
Now I realize Greenspan probably kept interest rates too low after the the dot.com bubble and 9/11 and Congress may have been too aggressive in requiring banks to lend to ‘subprimers’ and Bush may have gone overboard with his ‘ownership society’ schemes but at the end of the day it was the American people that did this. No one was flogged, marched down to a mortgage brokers office and water-boarded until they signed a loan to buy a house they could not afford. People did it to themselves. Now there decisions are affecting the rest of us in a negative way. Gee, thanks a lot. San Diego Medical Research Trials
Tough times in real estate may change the San Diego conventional wisdom that you can never lose in real estate. San Diego Bail Bondsman
Seems there should have been more government regulation and tighter qualification for subprime mortgages in order to prevent what we’re now facing. Las Vegas legal advice
It’s simple. House prices have to come down to pre-bubble level. It’s hard to take for a lot of folks. But that’s reality. San Diego lasik eye surgeon
The housing market is in balance when you can buy your house with your income. There is still long way to go! San Diego Tooth Whitening Specialist
The FED will not cut interest rates again and again… with such tight restrictions there isn’t going to be anyone left to buy, except the ultra-rich. San Diego Lawyers Group
The ones getting hurt are those in the middle class … again! The prices noted might be luxury homes in other parts of the country but in San Diego they are merely the average homes. So the average person will not be buying their own home. San Diego Real Estate for Sale