While the subprime sector has been everyone's punching bag for quite some time now, another sector has toiled with its own struggles largely unnoticed from the public eye. The jumbo loan market plays an important role in the wide mix of mortgage products, especially in the perennially high-cost areas like California. Loans over $417,000 are considered jumbo and nationwide their share last year of the total home loan pie was 16%.
What has happened is that borrowers even with stellar credit find it difficult nowadays to locate jumbo money. And the reason is that investors who buy this grade mortgage-backed securities are shying away from them because this past summer the ones they had bought earlier started going bad. They actually were marked junk, which isn't a label that instills much confidence in the investment world. The word is that unless new jumbo mortgages are underwritten with conservative guidelines, they won't sell.
Jumbo programs have typically been priced about a quarter percentage point higher than conventional loans and currently the spread is around three-quarters of a percent. In August the spread was one full point, so there has lately been some improvement.
Since the money is now scarce in high-cost regions, it normally puts pressure on prices as demand weakens. When an $800,000 house loses 15% of its value, which is $120,000, it is a lot of wealth thrown out the window. And that could spell from moderate to serious trouble for their economies. The effects would be felt from the home building industry to the street-level consumption. Think about this; jumbos accounted for 62% of the market in the San Francisco Bay Area early this year, so it is clearly at risk for a downturn.