Where did you go Jumbo?

I was on the phone with a past client last night that is building a $1,300,000 house and will need a loan for $800,000. When she asked about the rate on the 15 year fixed rate mortgage I tried to prepare her for the rate shock, but I almost had to call the paramedics after she heard the rate. As the fallout from the break up of the marriage of Wall Street and Mortgage Backed Securities continues, the pressing question on the mind of many borrowers is, “Why are Jumbo rates so high?” First we need to define what a Jumbo mortgage is and for that we turn to our new “bff” Wikipedia http://en.wikipedia.org/wiki/Jumbo_mortgages. Now that you know what a Jumbo mortgage is, hopefully the fact that it is the insurance companies and banks that are the ones who purchase these Jumbo Mortgage Backed Securities for their investment portfolios will help shed some light on why there is not as much demand for them. No different than any commodity in a capitalistic society, the laws of supply and demand rule the day. As the demand for these products has shrunk, the price of them has fallen. Because they are a bond instrument, back to my new “bff” http://en.wikipedia.org/wiki/Bond_valuation, when the price falls, the yield or interest rate rises. In the case of the Jumbo loans, the price has fallen so much that spread of the yield from Conventional loans is greater than it has been in the last 20 years. So we have all the Banks and Insurance Companies that would normally be gobbling these securities up straying away from them because they are mortgages.

Mortgages right now to investors are a very bad word. Jumbo mortgages are part of the 3 trillion in adjustable rate mortgages are coming due this year and next. There is too much demand for these products for the spread to stay where it is today. As I have challenged the industry before I will challenge them again. Somewhere there is an insurance company or a bank that is willing to put these loans on the books at a more reasonable price. As I type these words I am sure that those companies are out there, it is just harder to find them but we will!

For your comments or questions, please contact Chris Scheer at cscheer@cornerstonestl.com or 314.223.9824.