Jumbo mortgage market is beginning to thaw

The meltdown sent interest rates soaring and availability shrinking, but rates are declining and lenders are more willing to make loans that top the limits for Freddie Mac, Fannie Mae and the FHA.

By E. Scott Reckard

Phil Kelly had 18 more months to go before the fixed rate on his $2.5-million mortgage became adjustable.

But when Kelly, a former computer executive living in Rancho Santa Fe, learned he could knock his interest rate down by a full percentage point by refinancing, he went for it.

“It’s always tough to pick the exact bottom or top of anything,” Kelly said. “But I think this rate is about as low as you’re going to get.”

Rates on jumbo mortgages — loans of more than $729,750 in counties with the highest-cost housing — shot up during the financial crisis as lenders and loan investors shunned anything tainted with even a whiff of higher risk. Rates on big mortgages were especially high relative to those on smaller loans.

But in a boon for borrowers in California’s expensive housing markets, the jumbo-loan market is starting to return to normal.

Two weeks ago, the average interest rate on 30-year fixed-rate jumbos dropped to 5.79%, a nearly five-year low, according to rate tracker Informa Research Services of Calabasas. It edged up to 5.88% on Tuesday, still very attractive by historical standards. The average is down from well above 7% in late 2008.

Rates are even lower on so-called hybrid adjustable mortgages, on which the rate is fixed for, say, five years and then adjusts annually. Kelly’s new loan is a five-year hybrid adjustable identical to his old one, except that he’s paying about 5%, down from 6%.

Banks are also relaxing slightly some of their requirements for jumbo loans. That’s an encouraging sign because the market for jumbos, in contrast with the rest of the mortgage business, isn’t being propped up by Uncle Sam.

The lower rates and somewhat easier terms reflect newfound confidence among banks in the housing market. That’s because, by definition, jumbos are too big to be bought by Freddie Mac and Fannie Mae or to be insured by the Federal Housing Administration. Plus, the private market for mortgage-backed bonds dried up when the meltdown hit. So lenders making jumbo loans these days must be willing to take the risk of keeping them in their portfolios.

The maximum amounts for Freddie Mac and Fannie Mae “conforming” mortgages, and for FHA mortgages, are set by Congress. The cutoff for single-family homes was $417,000 from 2006 until February 2008, when lawmakers increased it temporarily to $729,750 in certain high-cost areas, including Los Angeles, Orange and Ventura counties. Conforming loans top out at $500,000 in Riverside and San Bernardino counties and $697,500 in San Diego County.

The increased upper limits, which have been extended until the end of this year, have created a three-tier system in expensive areas, mortgage professionals say: loans of up to $417,000, which are the easiest to obtain and carry the lowest rates; “conforming jumbos” from $417,000 to $729,750, which are somewhat harder to get and have slightly higher rates; and true jumbos, with the toughest standards and highest rates.

In the boom years of 2005 and 2006, interest rates were typically no more than a quarter of a percentage point higher on jumbo loans than on conforming loans, according to Informa Research. That widened as the mortgage meltdown intensified and home prices dropped in late 2007. The spread ballooned to nearly 1.7 percentage points in early 2009 after the entire credit system froze.

But this year the rate spread has narrowed to less than a percentage point. It could shrink more if conforming-loan rates rise as expected after the Federal Reserve wraps up a $1-trillion-plus program to support the market for conforming loans next month.

In addition to lower rates, down-payment requirements are being relaxed in some cases. For example, to write a jumbo loan in coastal areas of Los Angeles and Orange counties, Wells Fargo Home Mortgage looks for a 20% down payment or that percentage of equity, down from 25% last year, said Brad Blackwell, a national mortgage sales manager at the lender.

The reason: Wells believes high-end home prices are stabilizing in those coastal counties. But the bank still requires higher down payments in the Inland Empire and other battered housing markets such as Florida, Nevada and Arizona, where prices for jumbo-size homes don’t appear to be stabilizing, he said.

Jumbo loans remain much harder to get than before the credit crunch and recession. Borrowers typically must have a credit score of at least 700, compared with boom-era minimums in the 600s, though Laguna Niguel mortgage broker Jeff Lazerson said at least one lender was again making sub-700 jumbos available.

What’s more, unless their down payments are very large, borrowers must provide evidence of high income, have sizable bank accounts as a cushion against the unforeseen and occupy the houses themselves.

But there are clear signs that the jumbo market has loosened. One is an increasing availability of “stated income” loans — those that don’t require proof of income — of as much as $2 million to borrowers with at least a 40% down payment, said mortgage broker Gary Bluman, owner of Real Estate Resources in Brentwood.

Also, instead of a true jumbo loan, some “piggyback” second loans are available again to help certain borrowers with 25% down payments pay for high-priced homes, Lazerson said.

Of course, adjustable, stated-income and piggyback loans were big contributors to the mortgage meltdown. But such provisions are less risky if a borrower has 25% to 40% equity.

Despite the confidence in the market that such terms imply, lenders and mortgage investors are still dealing with piles of bad jumbos made during the boom.

Delinquencies of 60 days or more on prime jumbo loans that were packaged into securities jumped to 9.6% in January, up from 3.7% a year earlier, Fitch Ratings reported this month.

The jumbo delinquency rate in California climbed to 11.3% from 4.1% a year earlier.

For now, the jumbo market remains limited to the volume of loans that banks are willing and able to keep on their books. But there is hope for a return to private outside funding.

Although no jumbos have been turned into securities for at least two years, packages of delinquent jumbos have begun to be sold again to “vulture” investors, a sign that the secondary market for the loans may revive, said Michael Fratantoni, vice president of research at the Mortgage Bankers Assn.

“The ice sheet,” he said, “is starting to crack here and there.”

scott.reckard@latimes.com

Copyright © 2010, The Los Angeles Times

Home prices show small gain in December

Prices increased 0.3% from November, according to the Standard & Poor’s/Case-Shiller index. It was the seventh straight month of gains, but the improvement continues to be weak.

Home prices gained for the seventh consecutive month in December, with Los Angeles and other West Coast cities posting the biggest rises, according to a closely watched index released Tuesday.

The Standard & Poor’s/Case-Shiller index of 20 metropolitan areas scored a modest 0.3% increase on a seasonally adjusted basis.

That’s not huge, but analysts were cheered that prices didn’t dip and that 14 cities posted increases, including hard-hit markets such as Los Angeles, San Diego and Phoenix.

“We have another month of encouraging data,” said Michael D. Larson, a housing and interest rate analyst with Weiss Research. “You have broad-based stabilization in housing, but no rip-roaring rebound.”

The index is an average of three months, so December’s results included sales of homes that closed in October, November and December.

During October and November, demand for homes surged before the expiration of a tax credit for first-time buyers. Congress in November extended and expanded the credit through April.

Los Angeles was the biggest winner of the 20 cities, with home prices up 1.4% on a seasonally adjusted basis in December over November. San Diego was up 1.1% and San Francisco rose 1%. Analysts attributed the California gains to many investors seeking to scoop up foreclosure properties and buyers taking advantage of low prices.

“California is an efficient market,” Cameron Findlay, chief economist at LendingTree.com, said. “Buyers are more astute in terms of monitoring market changes, and in general, they will always lead the market out of a recession.”

Case-Shiller compares sales of detached houses with previous sales and accounts for factors such as remodeling.

Although prices were up from the previous month, they were still lower than a year earlier. The index for 20 cities was down 3.1% compared with December 2008.

In a separate Case-Shiller index, national prices were down 2.5% in the fourth quarter compared with the same period in 2008. But that’s far better than earlier in the year, when the index was down 19% in the first quarter, 14.7% in the second and 8.7% in the third.

“As measured by prices, the housing market is definitely in better shape than it was this time last year, as the pace of deterioration has stabilized for now,” said David M. Blitzer, chairman of the S&P Index Committee. “However, the rate of improvement seen during the summer of 2009 has not been sustained.”

Still threatening a substantial housing recovery this year is the potential for more foreclosures as Americans lose their jobs and fall behind on their house payments. In particular, experts are worried about “strategic defaults,” in which homeowners walk away from properties because they owe more than the properties are worth.

More than 11.3 million homes, or 24% of all properties in the U.S. with mortgages, were in a negative equity position at the end of the fourth quarter of 2009, according to data released by First American CoreLogic. That was an increase from 10.7 million, or 23%, at the end of the third quarter.

“Forces that will bring home prices back down are growing,” wrote Patrick Newport, an economist at IHS Global Insight, in a note to clients. “The big unknown about foreclosures is whether another surge is in the cards because of strategic defaults.”

alejandro.lazo@latimes.com

Copyright © 2010, The Los Angeles Times

Southern California economic recovery is forecast

Modest growth is likely this year and next, but unemployment will remain high, according to the report from the Kyser Center for Economic Research.

Southern California is headed for a gradual economic recovery in 2010 and 2011, along with the rest of the state and the country, according to a forecast released today.

Unemployment will remain elevated, but the entertainment, international trade and tourism sectors will push growth regionally, according to the report from the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp.

“The feeling is that the worst is past and we are looking at a modest recovery,” said Jack Kyser, founding economist of the center. “But there’s still fear out there. We’ve got a ways to go to get back to our peak.”

Although the economy is improving, there won’t be much short-term relief for California’s unemployed. The state has lost more than half a million jobs since 2008 and isn’t likely to see employment growth until 2011. The state’s unemployment rate, which hit 12.4% in December, is projected to stay there, averaging 12.4% for 2010 and falling only slightly to an average of 12% next year.

Tight credit and uncertainty over federal healthcare reform and the staying power of the budding recovery have made employers reluctant to hire, Kyser said. As business picks up, he said, many are coping by giving their employees more hours or by hiring temporary staff instead of full-time workers.

“There’s been a lot of pain around the region,” he said.

Nationwide, the unemployment rate will average 9.9% in 2010 and 9.4% in 2011, compared with the 9.7% rate posted last month.

Job losses should slow dramatically in Southern California. Los Angeles County is projected to lose 19,200 jobs this year after losing 154,000 in 2009. Riverside, San Bernardino, Orange and San Diego counties are also expected to post modest job losses this year. But the region is likely to see net job gains in 2011 — more than 80,000, according to the forecast.

California’s housing market also will continue to improve. Permits for new homes are expected to rise, but nowhere near the levels seen during the housing boom. More than 6,300 permits in 2010 and 9,845 in 2011 are projected to be filed in Los Angeles County. That’s up from 5,610 last year but far short of the 26,935 permits recorded in 2004.

Home construction this year should accelerate statewide to 45,000 permits, a 24.3% increase over 2009. But the permit value of commercial building probably will drop 12.4%, the forecast said.

Personal income, which declined 1.5% in L.A. County last year, is projected to increase 1.8% in 2010 and 3.8% in 2011. That should help the recovery of the retail sector.

But manufacturing, traditionally a source of solid jobs with benefits, will stay distressed as it battles outsourcing and overseas production.

“They’re trying to be as lean and mean as possible,” Kyser said. “The sector has really been hammered and continues under extreme pressure.”

Several major infrastructure projects across Southern California, including at the ports and Los Angeles International Airport, will bolster the local economy, Kyser said.

The entertainment industry is benefiting from a state incentive program, the slow return of advertising and a “binge” of pilot orders from broadcast TV networks and cable channels.

The recent opening of the JW Marriott hotel near the Los Angeles Convention Center, along with additions and improvements at theme parks, will drive tourism traffic into the area, Kyser said.

Other bright spots in Los Angeles County include healthcare services and private education, which will each add thousands of jobs in 2010, he said.

But the state budget crisis will weigh on the economy, Kyser said. Municipal and county budgets have shrunk, and staff layoffs and service cuts are on their way.

And if the Defense Department halts Boeing Co.’s C-17 program, thousands of local support and assembly employees and subcontractors could lose their jobs.

“It’s going to be interesting,” Kyser said. “A few smaller cities might have to declare bankruptcy.”

tiffany.hsu@latimes.com

Copyright © 2010, The Los Angeles Times

HOUSING

Southern California home prices rise 8.6%

But January’s year-over-year increase to $271,500 is a 6.1% drop from December. Total sales climb about 1% from a year earlier.

Home sale prices in Southern California showed fresh strength in January, bouncing 8.6% from the same month one year earlier — a period when the market was inundated with steeply discounted bank-owned properties.

But compared with a particularly strong December, the median fell 6.1% to $271,500 in January, ending eight consecutive months of price appreciation or stability in the Southland, MDA DataQuick, a San Diego real estate research firm, said Tuesday.

The month-to-month decline was attributable in part to the higher percentage of cheaper Inland Empire homes that sold in January compared with December as buyers in pricier locales stopped searching during the holidays and investors and first-time buyers made up a larger share of shoppers.

“The [January] numbers reflect, for the most part, people who would be out shopping in the middle of the holidays anywhere from late November to early January,” DataQuick analyst Andrew LePage said. “So it doesn’t surprise me that the concentration shifts a little bit back toward investors and first-time buyers, who probably feel the most urgency to snag what they consider a deal. A lot of other potential buyers would have been focused on other things during the holidays.”

Results from the first two months of the year don’t typically provide an indication of how the rest of the year will shape up, LePage cautioned.

But the mixed results come as Washington policymakers and experts intensely debate the future of the nation’s housing market. Many experts fear the market will suffer after the government ends a slew of policies intended to prop it up.

The Federal Reserve, for instance, plans next month to end a $1.25-trillion program that has helped keep interest rates at rock-bottom levels by purchasing mortgage bonds from Fannie Mae and Freddie Mac.

The Federal Housing Administration, which has backed mortgages for many first-time buyers, is expected to tighten its lending criteria later this year. And an extended federal tax credit of up to $8,000 for first-time home buyers and up to $6,500 for some current homeowners expires April 30.

Some analysts expect the market to get another boost as the tax incentive expiration nears. But as the federal measures unwind, the housing market will be weighed down by high joblessness and foreclosures.

“Beyond the spring, everything will depend on what is going to happen with those delinquencies. Are they going to turn into foreclosures or notices of default? And what are the banks going to do with them once they have them?” said Gerd-Ulf Krueger, principal economist at Housingecon.com. “There will be very significant pressure on the banks to behave reasonably . . . and then it is anybody’s guess what happens after the midterm election.”

Many real estate agents and experts are anticipating an early spring shopping season, given the tax credit and low interest rates, but say a lack of new foreclosures has slowed the sales pace. A total of 15,361 homes sold in Southern California in January, an increase of only 0.9% over the same month a year earlier when the market for lower-end, bank-owned properties began to take off, DataQuick said.

“We have more buyers than we have inventory,” Lakewood Realtor David Emerson said. “Everything has been skewed partly by the tax credit, so it is an abnormal year, and I think it will still continue to be.”

Sales dropped 31.2% in January compared with December. A decline between those two months is normal; on average, sales have fallen 28.4% in that period every year since DataQuick statistics began.

The number of foreclosures as a percentage of the resale market ticked up slightly in January. Foreclosure resales made up 42.1% of all sales of previously owned homes in Southern California, up from 39.6% in December but down from 56.4% in January 2009.

alejandro.lazo @latimes.com

Copyright © 2010, The Los Angeles Times