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August 26, 2007

Today's Housing Bubble Post - Spreads to Jumbo Loans

-- by Dave Johnson

The effect of the "credit crunch" are starting to ripple out.

You've probably been reading the houses "at the top" are still selling. Expensive houses require big mortgages - called "Jumbo" loans. And getting a jumbo loan has gotten much harder, which means there will be fewer buyers for the houses at the top, which means they are going to sell fewer of them, which means prices there will also have to start dropping. Growing mortgage crisis spreads to jumbo loans,

The evening before their home purchase was to close, Gary Becker and his wife, Amy Dacus, learned their mortgage to buy a Woodinville home had evaporated.

Unlike subprime borrowers defaulting on loans, the couple had a stellar credit score, a 20 percent down payment, strong employment history and had effortlessly purchased three prior homes.

But their new home's $670,000 sales price was large enough to require a "jumbo" loan, so named because it was for more than $417,000, the limit the nation's largest mortgage backers will fund.

Why is this happening?
The credit crunch isn't universal.

Borrowers with good credit scores, good jobs and a down payment still have ready access to 30-year "conforming" loans — those funded through banks and mortgage brokerages by Fannie Mae and Freddie Mac, the giant federally chartered companies that fund the bulk of the nation's mortgages.

But Fannie and Freddie cap their loans at $417,000, which means that banks and mortgage companies must tap other sources, such as mortgage-backed securities, for jumbo funds.

In recent weeks a skittish Wall Street has loudly signaled its unwillingness to invest in these securities.

Update - I just have to add this. Maybe we need a version of the Darwin Awards for people who just refuse to keep up with the news and try to buy a house in this market. The people who are not getting the jumbo loans are dodging a huge bullet. What kind of idiot is trying to buy an expensive house in a market where every single news story talks about how no one can sell a house, no one can make their payments, and prices are going to drop dramatically in the next few years?

I mean, if you can get a seller to accept an offer for 1/3 less than they want for the house - well maybe then, but you still might lose your shirt of prices fall to where they should be, which is about half where they are.

Posted by Dave Johnson at August 26, 2007 7:58 AM

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Heh! This is in stark contrast to three ads I was just sent for apartments selling at $1,700,000 here in Greenwich Village! One was really nice; the other two are crummy walk-up apartments! They'll undoubtedly find buyers at this price, considering the NYC market. Are those buyers going to be able to find loans? Any hope that prices will have to come down at last, even in NYC?

Posted by: MJ [TypeKey Profile Page] at August 26, 2007 10:44 AM

Note on Jumbos: it's usually the only type of mortgage available for multi-family homes, where an owner will occupy one family and rent the others for income-- often a good way for a small family to get a leg up into home ownership.

Posted by: Glenn Hauman [TypeKey Profile Page] at August 28, 2007 11:48 AM

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