March 25, 2013

Jumbo Mortgages Ramping Up, FHA Winding Down

March 25, 2013

Jumbo Mortgages Ramping Up, FHA Winding Down

I said Friday that this week might open with rate locking opportunities as fear of eurozone debt contagion fueled a mortgage bond (MBS) rally. At first, news of a bailout in Cyprus had the reverse effect. But then concern set in that this is a bad rescue template for the eurozone. And now rate locking opportunities are here indeed for home shoppers who get into contract in the coming days, and for refinance shoppers who have provided enough documentation to be properly pre-approved by their lenders.

Also to kick off the week, I want to give two important updates from each end of the lending spectrum: Jumbo and FHA.

The jumbo mortgage market continues to become more favorable for borrowers in high-cost areas. During most of the post-crisis years, the spread between a government backed (aka Fannie/Freddie) loan to $417,000 and a jumbo loan above that amount was as high as .875%. Today that spread is more like .25%.

A few weeks ago I explained why on the blog and on CNBC, and the short version is that private investor for jumbo mortgages has grown along with the underwriting quality of those loans. In that post I discussed how non-agency (aka jumbo, aka non-Fannie/Freddie) MBS issuance estimates for 2013 were conservatively around $30b and some even say it could go a few multiples of that. Seems viable if the way the year is starting is any signal.

Closed and announced non-agency MBS deals total $3.6b so far in 2013, which already exceeds the 2012 total of $3.5b. Below is a quick update using Bloomberg data compiled by resident MBS expert @JodyShenn:

– Securitizations (aka creation of mortgage backed securities or MBS) of newly issued mortgages without government backing (aka jumbo or non-agency) peaked at $1.2 trillion in each of 2005 and 2006.

– From 2008 to 2010 there were no securitizations on newly issued jumbo mortgages.

– Securitizations of newly issued jumbo mortgages totaled less than $1 billion for 2010 and 2011 combined.

– Securitizations of newly issued jumbo mortgages totaled $3.5 billion in 2012.

– Securitizations of newly issued jumbo mortgages is already at $2.1 billion for 2013.

– On top of this, announced-but-not-closed deals on securitzations of newly issued jumbo mortgages total another $1.5b as follows: $576.4m Redwood Trust, $308m Everbank, $616m JP Morgan.

This increased confidence and growth in jumbo MBS securitization keeps rates low for borrowers in high cost areas. But you can expect that the underwriting (aka loan approval) process will remain painstaking.

During the post-crisis years, FHA loans were a great way for borrowers with less than 20% down and/or less-than-perfect credit scores to obtain home financing. This is because the government loosened FHA guidelines and increased loan amounts. Only trouble is that the FHA has experienced large losses as a result and their primary source for funding comes from the mortgage insurance charged to borrowers.

So the FHA has been increasing mortgage insurance premiums since 2010, when the annual premium was .55% to.6% of the loan amount, paid monthly. So on a $500,000 loan the monthly mortgage insurance was $229. Not a bad tradeoff for putting just 10% down, especially when you consider that if they paid the loan down to 78% of original purchase price in the first five years (or anytime thereafter), their mortgage insurance goes away.

Compare that to what you see in the table below: the April change will take that range up to 1.3% to 1.55%. So on that same 10% down scenario resulting in a $500,000 loan today, the monthly mortgage insurance is will increase to $542 on April 1. And as of June 3, the mortgage insurance must be paid for 11 years.

That 11 year threshold means the home has 33% equity based on normally scheduled mortgage payments with no extra principal pay down by borrower. These new rules give the FHA more padding, but they remove the option and incentive for a borrower to pay down extra to eliminate the mortgage insurance sooner.

Right now, and until June 3, if a borrower paid their normal mortgage payment (without making any extra principal payments), they would be able to eliminate their mortgage insurance in about 6 years—and if they wanted to do it more aggressively they can pay a bit extra to knock it out in 5 years.



So there’s a small window left for borrowers with less than 20% down to capture the current FHA rules: To get a Case Number in time for the April 1 deadline, borrowers should plan to apply with a lender in the next 1-3 days. To get a Case Number in time for the June 3 deadline, borrowers should plan to apply with a lender no later than May 24.

After that, the more viable options for borrowers with less than 20% down will be loans with private mortgage insurance (as opposed to FHA mortgage insurance). The private mortgage insurance (PMI) companies have eased approval guidelines a bit as the recovery trudges on, and their fees are definitely cheaper, ranging from .64% to 1.02% depending on credit score (or $267/mo to $425 on that same $500,000 loan example used above). But their approval guidelines are more stringent than FHA. They require higher credit scores and more income.

So from here out, borrowers with less than 20% down need to look at both options.

And one important closing note: second mortgages have made their way back into the market, so for borrowers with less than 20% down, this is another option that’s rapidly evolving and it doesn’t have mortgage insurance. A common structure for this market is 10% down using an 80% first mortgage and a 10% second mortgage. We’ve been quietly testing these new options and just closed a purchase deal in 21 days. Very encouraging. More on this topic shortly…
Everbank and JP Morgan Join Jumbo Mortgage Bond Issuance Revival

Redwood To Sell Securities Backed By $576.4m of Jumbo Mortgages

Why The Jumbo Mortgage Market Is So Hot

Higher FHA Mortgage Insurance Fees For Longer As Of April 2013