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Weekly UpdatesAS THE MARKET FOR MORTGAGE-backed securities has dried up, so has that for jumbo loans, and that has siphoned dollars from Arkansas mortgage lenders' bottom lines.
The consensus among local mortgage lenders: Congress needs to increase the limit to qualify for a conforming loan, which is currently $417,000, while investors dust themselves off and get back on their feet.
Before August 2007, the market for jumbo loans--loans that exceed $417,000--was very active and liquid, said Todd White, a senior vice president at Arvest Mortgage Co. of Lowell.
"It appeared that [the secondary market was] hitting on all cylinders," White said. Players in a secondary market buy loans after another bank originates them.
But like many things that appear too good to be true, the secondary market for jumbo loans had a flaw.
It was totally private.
In the secondary market for conforming loans--those under $417,000--the government-sponsored enterprises Fannie Mae and Freddie Mac buy up conforming mortgage loans. But Fannie and Freddie could not, until recently, buy loans over $417,000. Even now, they can buy nonconforming loans only in certain areas, but none of those is in Arkansas.
"The conforming loan secondary market is primarily driven by Fannie Mae and Freddie Mac, which keeps it very liquid," White said. "It's moving all the time. It's very liquid. There is a market there every day.
"The jumbo market is primarily a private security market, which means if, for example, it's being driven by Wall Street firms that may be packaging up jumbo mortgages into a mortgage-backed security and they stop, then there's no market, which is effectively what happened in the fall of 2007."
When credit markets began to unravel, White said, the conforming market--though it was certainly broken--maintained some semblance of normalcy because of its proximity to the government's pockets through Fannie Mae and Freddie Mac.
The jumbo secondary market, however, went into hiding for about three months.
"For a while, you just virtually couldn't get a jumbo fixed-rate loan," White said. "And if you did, it was going to be 2 percent higher on the rate."
Though the market has relaxed somewhat since, the jumbo market is still incredibly timid, even in Arkansas.
Steven Plaisance, executive vice president of secondary marketing at Arvest, said that "back in the good old days," jumbo loans would comprise 7 percent to 10 percent of Arvest's business, which for 2007 was between $58 million and $83 million.
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Now, Plaisance said, Arvest is making hardly any jumbo loans.
See You Later, Aggregator
Gene Holman, president of the mortgage division at Bank of the Ozarks of Little Rock, said the gun-shy secondary market is still affecting the Arkansas mortgage business.
Holman said that before August 2007, jumbo loans accounted for about 20 percent of Bank of the Ozarks' business, which would be about $32 million in Arkansas. In 2008, jumbo loans reached only between 3 percent and 5 percent of Bank of the Ozarks' business, Holman said, or about $4.7 million to $6.4 million in Arkansas.
"The issue with the jumbo loans today is that because of the problems in the mortgage market, the aggregators of these loans are not readily available; they're not attracted to these loans. And so there's not a whole lot of outlets for them," Holman said.
"The way that people--aggregators--get money for jumbo loans is that they aggregate them into pools, and then they issue a mortgage-backed security and sell that mortgage-backed security to get the money to make the jumbo loans," Holman said. "And those mortgage-backed securities are viewed as more risky today than they were 12 months ago, so the rate disparity is there."
Holman said jumbo rates loom 2 percentage points to 2.25 percentage points higher than a conforming loan rate.
Kathryn Sims, senior vice president of First Security Bancorp of Searcy, echoed other local bankers.
"We just haven't had much luck with [jumbo loans]," she said. "And every time we talk to our investors, they just almost all tell us, 'We don't want them.'
"In fact, I was talking to a few of them the other day, and some of them just came right out and said, 'We just aren't interested in jumbos right now.'"
The situation was the opposite before August 2007, Sims said. "They were all just clamoring for them."
Sims said that back in 2007, jumbo loans or loan packages exceeding $417,000 accounted for just over 5 percent of First Security Bancorp's business--jumbos of about $10 million in Arkansas. In 2008, jumbo packages accounted for only about 1.25 percent of First Security's business, or about $2.3 million in Arkansas mortgages.
And the very few who will take a jumbo loan look for any reason not to take it, Sims said.
"That's not saying that some of them are still not doing them. But they have put so many criteria on them that it's very difficult to get them through. The appraisals are so difficult to get through with the [comparables] that it's just almost impossible," Sims said.
"They just really, we call it, tear the file apart just looking for any reason to turn down the file instead of trying to make the file."
Market Effects
Compounding the problem is the market turmoil that has squelched a creative method bankers have used for years to circumvent the jumbo cut-off, which is a calculation based on the median home price.
Bankers would construct a first mortgage of $417,000 at a 15-year or 30-year fixed rate; that mortgage then could be sold to Fannie or Freddie.
Then the bank would finance the rest of the loan on a second mortgage, and still at an attractive rate.
Now, bankers can't unload that second mortgage.
"When you're in second position, you're really in no position," said Scott McElmurry, president and CEO of Bank of Little Rock Mortgage Corp.
Holman said homebuyers now were confined to whatever the local banker can finance when it comes to the second mortgage. And only customers with stratospheric credit scores get those.
Sims said First Security also had struggled with the second mortgage. "We don't have a lender that will take the second [mortgages]," she said.
Because homebuyers either have to take a higher interest rate or make a down payment large enough to get the loan under the $417,000 cutoff, the pool of buyers of expensive homes has shrunk substantially.
"You can probably take $500,000 and higher is the market that's affected by the lack of jumbo loans, because if you have a $600,000 house and the person came in and put 20 percent down, they still need $480,000," McElmurry said.
McElmurry said that the stalled jumbo market would force the buyer of an $800,000 home to make a down payment of nearly $400,000 to avoid a high interest rate. Because many who could afford the monthly payments don't have that kind of cash up front, that pool of homebuyers has dwindled.
McElmurry said that before August 2007, jumbo loans made up 2 to 3 percent of Bank of Little Rock's portfolio. Now the bank has nothing jumbo in its portfolio.
The Fix
Congress has increased allowable conforming limits to deal with high-cost states and high-cost counties, McElmurry said.
"But nowhere in Arkansas does it qualify as a high-cost area. So you're basically talking about the East and the West Coast that allows you to maybe go up to $650,000 to $700,000 on a conforming basis."
McElmurry said for jumbo loan rates to decrease, one of two things has to happen. "Either Congress allows Fannie and Freddie to increase their loan limits to basically cover all states, or Wall Street or some other entity is going to have to start securitizing and pulling those types of loans," he said.
Plaisance of Arvest added that the market couldn't rebound until investor confidence returned.
"Because so many investors got burned on mortgages, they're sort of avoiding the lot of them just in general because they're guilty by association," Plaisance said. "Even though, arguably, today some of the best mortgage loans are being produced that will ever be produced because the standards are much more stringent today, much more reasonable."
Aside from a return of investor demand, Plaisance said one other thing must occur for the secondary market for jumbo loans to stabilize: "a return to reasonableness."
By Jamie Walden
jwalden@abpg.com
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