The feared jumbo mortgage debacle is here — thanks to the coronavirus — and ready


Back in January, my column for Marketwatch detailed the massive danger that jumbo mortgages posed for U.S. mortgage and housing markets. After months of actions to counter the impact of COVID 19, the potential jumbo mortgage disaster is clearer than ever.

Jumbo mortgages are loans that are larger than the limits set for Fannie Mae, Freddie Mac or the FHA to guarantee or insure. During the craziest years of the housing bubble, 2004 through 2007, close to $3.1 trillion in jumbos was originated.  Most were offered with insanely easy terms, which helped precipitate the collapse that followed.

As housing markets plunged over the next five years, jumbo loans for home purchases all but dried up. Jumbo mortgage lending returned only gradually during the early years of the so-called housing recovery.   

All that changed starting in 2016.  Since then, jumbo mortgage lenders have tripped over each other to hand out huge loans to applicants.  Between 2016 and 2019, roughly $1.5 trillion of these jumbos were originated.  Cash-out refinancing also returned with a vengeance. Reversing the traditional approach, interest rates and underwriting standards for jumbos were actually lower than for conventional loans.  For these lenders, mortgages offered to high-income borrowers who could afford the monthly payments seemed the least risky of all.

Look at the table below showing jumbo originations in the 25 largest U.S. metros since the peak of the housing bubble.  Roughly two-thirds of all jumbo loans have been originated in these 25 major housing markets.

Wealthy homeowners in trouble

Since the COVID-19 related lockdowns began in late March, most media attention has been focused on soaring unemployment rates for lower income workers in service industries.  For good reason. According to data provider Black Knight Financial Services, 46% of borrowers who obtained a forbearance actually made a mortgage payment in April.  However, that percentage has plunged over the past two months. According to Black Knight, 22% of borrowers had paid their mortgage in May and only 15% did so in June. 

Read: Home prices could fall in major cities as Americans sour on urban living, says Nobel Prize-winning economist Robert Shiller

Also see: More than 20 million Americans may be evicted by September

What has been largely overlooked are the mounting problems of wealthier homeowners with jumbo mortgages. They have also been slammed by the lockdowns.  According to Black Knight, 11.8% of all jumbo loans were in forbearance as of June 16. …



Read MoreThe feared jumbo mortgage debacle is here — thanks to the coronavirus — and ready

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