Jumbo Mortgages Decline As People Spend Less

The affluent are the primary consumers of jumbo and super jumbo mortgage products. Although the jumbo mortgage market has not been as widely discussed as the conforming mortgage market in the current crisis, it is undergoing significant changes. April alone has seen one established player leaving the jumbo mortgage field while another joins it.

A jumbo mortgage is one that exceeds the loan limits set by Fannie Mae and Freddie Mac. The limit changes annually for mortgages on single-family homes. Interest rates on jumbo mortgages are generally higher than on conforming (those within the Fannie Mae/Freddie Mac limits) but vary in similar ways. Historically, jumbo mortgage rates exceeded conforming loan rates by 20 basis points, according to First Internet Bank of Indiana (First IB). Recently, that gap has widened to as much as 200 basis points or 2 percentage points.

Leaving the jumbo mortgage game is Thornburg Mortgage Inc., which announced earlier this month that the company planned to seek Chapter 11 bankruptcy protection. Santa Fe-based Thornburg was the second-largest independent mortgage company in the U.S. at one time. The Wall Street Journal reports that Thornburg’s financial problems stem from the collapse of the market for mortgage-backed securities rather than more familiar collapse of sub-prime mortgages. The company’s assets, other than mortgage servicing rights, will be sold or liquidated. The mortgage servicing rights, which were granted as security for various financing agreements with lenders including JPMorgan Chase Funding, Inc., Citigroup Global Markets Limited, Credit Suisse Securities, Credit Suisse International, the Royal Bank of Scotland, UBS AG, Greenwich Capital Markets, Inc. and Greenwich Capital Derivatives, Inc., will be transferred to the creditors pursuant to the agreements. At least one of these creditors, Credit Suisse, is seeking to sell more than $1.5 billion in mortgage securities previously owned by Thornburg Mortgage, according to Bloomberg. JPMorgan Chase & Co. and the Royal Bank of Scotland (RBS) are reportedly planning to liquidate the collateral they receive from Thornburg.

Thornburg Mortgage was founded in 1993 and had clients in all 50 states. It is a separate entity from Thornburg Investments which is also owned by Garret Thornburg.

“Thornburg Mortgage,Inc. Has been through a very difficult two years as it has tried to survive this tumultuous mortgage marketplace and we have done everything humanly possible over the past year to try to bring a satisfactory resolution to our situation,” Larry Goldstone, Thornburg Mortgage, Inc. President and CEO. “The sad fact is that the credit crisis has turned out to be far bigger than Thornburg Mortgage, and we could not overcome its challenges. We gave it our best shot against very difficult odds.”

Joining the jumbo mortgage game is the First Internet Bank (First IB) of Indiana.

“We are confident there is unmet demand for jumbo loans in today’s market, particularly sine the housing stability plan recently announced does not include relief for these borrowers,” said David B. Becker, President and CEO at First IB. “We are filling a void with an attractive jumbo mortgage loan product at a highly competitive rate. Of course, we are going to scrutinize these applications carefully, borrowers still need to be credit worthy and the property value must be sustainable.”

The jumbo mortgage loan product First IB introduced earlier this week is an adjustable-rate mortgage carrying a fixed rate as low as 5.375 APR with no points for five years. With $543 million in assets and customers in all 50 states, First IB is the first state-chartered, FDIC-insured institution operating solely via the Internet. First IB, an Equal Housing Lender, also offers conforming loans and home equity loans along with other financial products.

There is some debate whether the decline in jumbo mortgage originations is the result of declining demand or the increasing reluctance of lenders to make such substantial loans without government backing. In practice, why jumbo mortgages are difficult to find and obtain is not as important as what the contraction of the market reveals about the mortgage industry.

By Jay Hammond of Blown Mortgage