Thank You, Dr. Yellen—For That $1 Million Jumbo Mortgage At 100% Financing

The Fed was forced to note in its last meeting release that the housing market has hits some head winds. Well it might have. March new home sales were down by 13% and existing home sales by 8%. But an even more troublesome sign occurred at the bottom of the market where new applications for purchase mortgages of less than $150,000 actually dropped by 21% from last March.

Never mind that during the interim 12 months the Fed purchased nearly $1 trillion of government and GSE debt—–for the very purpose of forcing down interest rates and making mortgages cheaper. Indeed, driving the mortgage rate to lower and lower levels has been the essence of Fed policy since early 2009.

Thus, during the four years ending in May 2013, the 30-year mortgage rate was rammed down from 6.5% to a low of 3.2%. And as noted previously, that entirely artificial, Fed- engineered move did cause an outbreak of “refi madness”. Accordingly, several trillions of existing mortgages were refinanced into lower rates so that the mainly upper-middle income families who could meet current lending standards would have some additional discretionary income to buy a flat screen TV, dinner at Red Lobster or a new pair of shoes.

But the minute the Fed began to take its fat thumb off the scales—that is, buy less bonds under the “taper”—mortgages rates soared by more than 100 basis points and new originations crashed. During first quarter this year gross mortgage originations were down by 75% at the big home mortgage banks and nationwide levels were at 16 year lows.

It would be bad enough if this were merely a case of an extended “temporary” (e.g. four years!.) experiment in monetary stimulus that didn’t work. The nation’s incorrigible monetary central planners would undoubtedly just move on to some other attempt to manipulate and medicate markets in their spurious quest to cause economic growth and wealth creation by printing money.

But actually their “one size fits all” formula of interest rate repression actually does positive damage. It essentially causes economic resources and wealth to flow to the top of the nation’s economic ladder. That’s because the top 10% of households are still credit-worthy and the Fed continues to make credit ultra-cheap—thereby providing a massive incentive to borrow and a windfall gift to those upper rung households who understandably take advantage of the opportunity.

The giant windfalls obtained by Wall Street hedge funds and fast money traders playing the carry trades game with 0% repo financing is both self-evident and deplorable.  But that is not the end of the Fed’s reverse Robin Hood malefactions. It is now evident that some of the windfall is trickling down to the top 10% via a booming market in deeply subsidized “jumbo mortgages” (e.g. over $700k).

And do not think they are not “subsidized”.  Given America’s anemic savings levels, long-term interest rates on the free market would be hundreds of basis points higher than the Fed medicated rates at present. So on a $1.5 million jumbo mortgage call the subsidy about  $50,000 per year—which is to say, equivalent to the median family income.

As made clear in the Bloomberg story attached, jumbo loans are still surging and were up by 5% from last March. More importantly, as one veteran mortgage market observer notes, jumbo mortgages are the only game left. Stated differently, the Fed has monetized nearly $4 trillion of debt and what it has to show for it is a small cadre of extremely happy yuppies:

“Jumbos are growing while almost everything else is dead,” said Paul Miller, a banking analyst at FBR Capital Markets Corp. based in Arlington, Virginia. “Big banks need loan growth. If they were getting decent commercial loan growth, they wouldn’t be so aggressive on competing for jumbos.”

So, as the story below highlights, good for you, Todd Vitale. You got your subsidized loan and a dream home in part as a reward for your own enterprise. But what possible public policy purpose was served by making the financing artificially cheap at the expense of some unseen senior citizen whose savings account has been plundered by the same Fed manipulation that has fueled the jumbo loan surge:

Todd Vitale, a personal trainer who opened his own gym last year, said he was having difficulty getting a mortgage of more than $700,000 to buy a home in Greenwich, Connecticut, because his new business was untested.

Vitale then tried Wells Fargo & Co. (WFC), the biggest U.S. home lender, where he kept most of his savings in an account he opened more than a decade ago, he said. He worked with the bank’s private mortgage unit, whose clients are entitled to loans of up to $6 million and personalized service, and had the opportunity to explain that he had already run a similar business and could make the gym succeed. Wells Fargo approved his 30-year fixed-rate mortgage of more than $700,000, he said.

“I don’t think I would have gotten a loan unless Wells Fargo private mortgage gave me a shot,” said Vitale, 38, who moved in to his new 3,000 square-foot home in February. “I would have had to walk away from the home.”

Nor is this the end of the story. Desperate for business that generates a yield above the Fed dictated minimums, the giant mortgage banks are now offering 100% financing to preferred clients. Better yet, in lieu of a cash down payment, the jumbo lenders are accepting a lien on brokerage account assets—that is, upper income winners in the Fed’s stock market bubble can now double-down with a cheaper mortgage and bigger house.

Listen to Dr. Yellen’s formulaic Keynesian blather before the Congressional committees. She has no clue as to the extent of the disorder, malinvesment, mayhem and social injustice that the Eccles Building is sowing all across the land:

At Bank of New York Mellon Corp., where the average size of a mortgage is $1 million, clients can get 100 percent financing. They don’t have to put any money down and can instead pledge assets in investment accounts as collateral, said Bill Sappington, head of private banking at the New York-based firm.

Here is further information on the Fed’s Robin Hood policies are work:

……Applications for jumbo mortgages of at least $729,000 increased 4.9 percent in March from a year earlier, while requests for loans of less than $150,000 fell by 21 percent, according to the Mortgage Bankers Association

Lenders are also vying for jumbos since they don’t have to pay higher guarantee fees charged by Fannie Mae and Freddie Mac to insure the bonds, as they do with conforming loans, said Richard Lepre, an Alamo, California-based loan officer with RPM Mortgage. That means they can charge lower rates on jumbos, making them more attractive than traditional loans.

The rate at Wells Fargo for a 30-year fixed jumbo mortgage was 4.13 percent as of yesterday, compared with 4.25 percent for a conventional 30-year fixed loan.

JPMorgan modified its guidelines in the third quarter for making jumbo loans to take into account a client’s total assets at the bank. The bank made the change after seeing that customers who had long-term relationships with JPMorgan were less likely to default on their loans.

The lender created a separate process last year to review all declined loans to ensure those decisions made sense. It also set up a group that works with wealthy clients who have more complex financial situations, such as self-employed borrowers.

“We leverage relationships to let the customers know we really want to do business with them,” said Lesley Corydon, a senior vice president in the private client mortgage group at JPMorgan.

JPMorgan’s jumbo mortgage originations represented 21 percent of its total originations in the first quarter of 2014 compared with 10 percent a year earlier, according to the bank.

Customers of Chase Private Client, who have assets ranging from about $500,000 to $5 million in total wealth, increasingly are opting to use their deposits and investments as collateral when borrowing. Some clients use the credit as bridge loans or to make larger down payments….

“We are pleased to know that Mr. Vitale received assistance with his home lending needs,” said Emmanuel Vuillequez, product manager for non-conforming mortgages at Wells Fargo.

Last year, Wells Fargo created a special team of 400 underwriters spread across six U.S. locations who just focus on jumbo loans.

“Jumbo lenders are looking for ways to distinguish themselves from other jumbo lenders,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication in Bethesda, Maryland. “Jumbo lending was the bright star of the mortgage market last year, so everyone is looking to ride that momentum into 2014.”

….Bank of America in October reduced the down payment to 15 percent from 20 percent for most jumbos of less than $1 million. Existing customers at the bank may receive discounts on their mortgages based on their level of business with the firm, said Susan Atran, a Bank of America spokeswoman.

At the Charlotte, North Carolina-based bank, nonconforming mortgage originations were 37 percent of overall loans made during the first quarter compared with 22 percent a year earlier, according to the firm.

RPM Mortgage this year began offering new jumbo adjustable-rate mortgages with initial low rates. One of their loan products provides a fixed rate for five years at a maximum of 2.63 percent, and then resets once during the next five years to no more than 4.63 percent, Lepre said…….

Today, demand for jumbos is growing as borrowers resume buying second homes or investment properties, according to Chase’s Corydon. Banks are often fighting for loans in the $1 million to $2 million range, said Mike McPartland, head of lending for Citigroup Inc.’s (C) private bank.

“If in the past, I was competing with two private banks, now it feels like I’m competing with two private banks and two regional lenders for that $2 million mortgage,” said McPartland, whose clients generally have at least $25 million in net worth. “The benefit to working with a bank that knows you is we don’t treat a mortgage like an isolated financial transaction.”

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