Thread: Jumbo mortgages may be next in line to default

Jumbo mortgages may be next in line to default

By Kenneth R. Harney, Published: November 11
25 Comments

Do you have a big mortgage and good credit scores but not much equity — maybe you’re even underwater? Do you see little chance that your home’s market value will improve much during the coming three to seven years?

If you answered yes to both questions — and thousands of homeowners across the country could do so — new research suggests that you are in a category that lenders need to worry about most: prime jumbo borrowers who once were thought to be among the safest bets but who now are the most likely to opt for a strategic default and walk away from their homes.

In a study released Oct. 31, the ratings agency Moody’s said that based on its analysis of mortgage-backed bond portfolios, homeowners with jumbos now constitute “greater strategic default riskâ€

Today, I've got answers to reader questions on home and student loans, but first an update from Congress, which was considering reinstating higher limits on government-backed home mortgages in about 670 high-cost counties, including most of the Bay Area.

The maximum loan backed by Fannie Mae, Freddie Mac and the Federal Housing Administration in these areas had dropped to $625,500 from $729,750 on Oct. 1. Late Thursday, Congress voted to reinstate the higher limit on FHA loans through 2013, but not on Fannie and Freddie loans. It was a compromise between some Republicans who want the government out of the mortgage market and legislators from areas with high housing costs.

The move was a little surprising, considering that FHA was created to provide credit for marginal borrowers and makes loans with as little as 3.5 percent down.

"This is all about members of Congress having trouble letting Fannie or Freddie take on any more risk. They are both politically toxic and (legislators) felt pressure to reraise the limit, so this was the politically expedient way of doing it," says Edward Mills, an analyst with FBR Capital Markets.

Unlike Fannie and Freddie, FHA has not needed a taxpayer bailout, although according to one report, there is a 50-50 chance it could in the next couple of years, says Keith Gumbinger, a vice president with HSH.

Borrowers in qualifying counties who need loans between $625,000 and $729,750 will have two options: an FHA loan or a jumbo loan in the private market. FHA requires initial and annual mortgage insurance premiums, but it could offer rates that are perhaps 0.75 percent lower than private-market jumbos, Gumbinger says.

He adds that private jumbos will require higher credit scores and down payments but that a larger down payment in the private market may mean a lower cumulative mortgage insurance cost.

Borrowers will have to carefully weigh these trade-offs.

Q: In response to my Thursday column on the government's new HARP 2 refinancing program for underwater homeowners, David C. asks, "Where can I get analysis of whether I qualify for the HARP 2 refinance from a disinterested party that's not from my current mortgage holder or someone who will want to sell me their services?"

A: Real estate website Zillow.com has a calculator that lets you determine whether you are likely to qualify. It includes links to websites (and phone numbers) where you can see whether your mortgage is owned by Fannie Mae and Freddie Mac, a key requirement.

For a more detailed analysis, consult a nonprofit housing counselor approved by the Department of Housing and Urban Development. To find one, go to hud.gov/offices/hsg/sfh/hcc/hcs.cfm.

Q: Susan M. asks, "Does HARP 2 apply to owners/borrowers who are not currently living in the property?"

A: Yes. Eligible properties include one- to four-unit primary residences, second homes, and one- to four-unit investment properties, including single-family homes, condos, co-ops and manufactured housing, according to Fannie Mae guidance.

However, owners could be charged a higher risk-based fee if the property being refinanced is not their primary residence. Under the new program, Fannie and Freddie can charge up to 2 percent of the loan balance, compared with 0.75 percent on owner-occupied homes, according to a Fannie Mae spokeswoman.

Q: Robin S. writes, "Why are student loans the only loans that are nonnegotiable, both at inception and at a later time? Why can't student loans be refinanced like other loans when interest rates are in decline? It seems that students should be at least as deserving of getting a break as average homeowners."
A: Mark Kantrowitz, publisher of Finaid.org, says student loans do not have prepayment penalties, so nothing prevents you from refinancing them if you can find a loan with a less expensive interest rate. "That's a big if, since federal student loans are unsecured loans with discounted fixed rates made without regard to the borrower's credit history or income," he says. "Even if you have an excellent credit score, you will find it very difficult to get a private student loan from a bank with a lower fixed rate.

"If you own your home, you might be able to find a fixed-rate home equity loan or cash-out refinance at a lower rate than on the student loans, if you have excellent credit. But if you default on your mortgage, you can lose your home. If you default on a student loan, they can't repossess your education," Kantrowitz says.

He adds that Congress is not likely to increase per-student spending on student aid during the next decade. So if it cut interest rates on federal education loans, it would have to cut other student aid programs to balance the budget, such as the Pell Grant program or the education tax benefits. "But this would not serve any public policy objective," Kantrowitz says.

"Cutting the interest rates would not increase the number of students enrolling in college or graduating from college. All it would do is reduce the debt at graduation and make it easier for borrowers to repay their loans. Cutting the Pell Grant would make college a lot less affordable for low- and moderate- income students, forcing many of them to drop out."

Q: Laura L. writes, "I read recently that Obama is trying to pass a law that makes individuals eligible to tap into their 401(k) and IRA accounts to help with mortgage payments without facing that 10 percent penalty. Have you heard of any progress with this?"

A: You might be talking about the Hardship Outlays to Protect Mortgagee Equity, or HOME, Act, sponsored by Sen. Johnny Isakson (a former Realtor) and Rep. Tom Graves, both Georgia Republicans.

It would let homeowners withdraw up to $50,000 from their retirement accounts to make timely mortgage payments without paying the 10 percent penalty usually imposed on withdrawals before age 59 1/2. They would still have to pay income tax on the withdrawal.

The bill was introduced in October and hasn't gone anywhere yet. But it sounds like a bad idea.

"It could turn people who can't pay their bills now into people who can't pay their bills in retirement," says Jeffery Levine, an IRA technical consultant with Ed Slott & Co.

If people try to save their homes by tapping their retirement and end up losing the house anyway, they will have no home and no retirement, he adds.

Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com. Tweeting @kathpender.com.


Read more: http://www.sfgate.com/cgi-bin/article.c ... z1eGWUDeBH