Current housing recovery chatter centers around two main themes:
- slightly improving stats on home sales, prices and foreclosures
- low rates vs. tight credit
Let me bring you into the trenches on theme two because it feeds theme one.
Most mentions of “tight credit” are broad macro assertions but the press rarely details loan guidelines consumers face on the ground. So let’s look at how loan guidelines impact credit availability in the jumbo loan market. That is, the market for loans above the Fannie/Freddie caps of $417,000 to $625,500 (depending on region).
On one jumbo loan I just made, we were verifying unsourced deposit line items on a borrower’s bank statement—standard procedure for unsourced deposits over $1000.
This self-employed borrower’s bank statement showed the borrower made a deposit of $8111.13. We sourced it with two checks borrower deposited with a bank teller on the date noted on the statement: one for $5965.84 and one for $2145.04.
But wait says our underwriter: that only adds up to $8110.88.
We retort to our underwriter explaining that this self-employed borrower provided copies of two checks from clients that comprised all but $.25 of the deposit. That should be sufficient, I argued.
Still underwriter won’t allow loan to fund and close until the deposit paper trail reconciles with deposits—to the penny.
My team and I deliberate for a whole day on how to tell the borrower about our missing quarter. This is critical time lost during a purchase escrow which, it’s worth noting, was a 21 day close with a 14 day financing contingency—because in Silicon Valley where this borrower was buying a home, the purchase market is so competitive that if you don’t allow realtors to write purchase offers that agressive (or more so), the borrowers can’t win bids to buy homes.
Finally the next day I just have to take it head on and tell the borrower that we need to source the additional $.25.
Turns out borrower had received a 25 cent dividend check from a stock he owns and included it with his deposits that day. This was a two day process that was quite vexing for us and borrower—TO VERIFY 25 CENTS!!
But that’s the level of detail that (especially) jumbo investors require to buy loans from lenders. And the ability for lenders of all sizes to sell loans is critical for rates to remain competitive throughout the U.S.
It’s also why there’s been such a big rate spread between Conforming loans that Fannie & Freddie will buy and Jumbo loans above the limit they’ll buy. The liquidity Fannie, Freddie (and Ginnie Mae for FHA loans) provide for lenders enables lenders to keep making new loans and to keep rates lower. Same concept goes for jumbo lenders, but it’s been a rough road in that market.
Even the lenders doing jumbo loans since 2008 have mostly been retaining them on their balance sheets because there has been no place to sell them. Consider these stats I gathered from Reuters and Bloomberg:
- From 2008 to 2010 there were no securitizations (aka creation of mortgage backed securities or MBS) on newly issued mortgages without government backing (aka Fannie, Freddie, Ginnie).
- Since 2010 there have only been eight securitizations of newly issued mortgages without government backing (aka jumbo or non-agency) for a total of $3.7 billion.
- Five of these eight non-agency securitizations have been in 2012.
- By comparison, non-agency securitizations peaked at $1.2 trillion in each of 2005 and 2006.
- And this non-agency MBS issuance ($3.7 billion since 2008) is a mere fraction of Fannie/Freddie MBS issuance ($1.24 trillion year-to-date 2012 alone).
The good news is that the non-agency market is thawing out, as my firm’s CEO told Bloomberg last week, and as the stats above prove.
The even better news is that this thawing has cut rate spreads between agency (Fannie/Freddie) and non-agency (jumbo) loans. Up until early Fall, a jumbo loan rate was about .625% higher and now it’s more like .375% higher—and it should be noted that’s a spread between tier-two conforming loans (from $417,000 to $625,500) and jumbo loans. If you compare tier-one conforming loans (up to $417,000) with jumbo loans, the jumbo rates had been about .875% higher and now it’s more like .625% higher.
So it’s fair to say that incredibly tight lending guidelines are the reason jumbo rates are getting better: tighter guidelines mean better loans, which means more securitization, which means more liquidity, which means more flexibility on rate pricing.
And it’s not just rates that tight guidelines help, it’s the macro picture too.
Think about why the global financial crisis started in the first place. Loans made with little to no guidelines underpinned the world’s mortgage securities and derivatives thereof. Then home prices dropped, the loans went bad, the securities followed, then the global financial system and economy.
Now it’s the slow, painful reverse: the loans are arguably the best credit quality ever underwritten (which is the temporarily painful part for consumers), property prices are finding bottom and rising in some areas, the non-agency securitization process is starting again, and the resulting securities will help contribute to economic recovery.
Key to sustaining that recovery is ramping up the non-agency market and winding down the government/taxpayer backed market.
It’s starting, albeit slowly, precisely because of tight guidelines.
Which is why I had to tell one of my most loyal clients who was buying a $1,435,000 home to accommodate a growing family that we couldn’t complete the loan without reconciling a discrepancy of 25 cents.
Don’t worry though: this was an anomaly due to the 25 cent check being randomly included with other large deposits. Like I said above, the sourcing of bank deposits is typically focused on line items $1000 or higher.
But this loan-level story makes the point: tight loan guidelines are good for financial market recovery, which is good for economic recovery, which is good for home prices, which might just bring some stability that’s been so elusive.
I’ll close by reiterating difference between “tight credit” and “tight guidelines.”
Tight credit is when you can’t get a loan with favorable terms. Tight guidelines are when you can but it’ll take some work and patience. The loan that prompted this post was for $1,148,000 or 80% of the $1,435,000 home purchase price.
Make no mistake: an 80% LTV loan above $1m isn’t tight credit (quite the contrary). It just took a couple extra phone calls and emails to satisfy tight guidelines and get it done. And despite the short-term pain, the long-term benefits impact everyone.