In a recession, should you still opt for larger loans?
Last April, a mortgage company that specializes in jumbo loans or mortgages that cost $417,000 or higher decided to file for Chapter 11 bankruptcy after months of losses and deteriorating balance sheets. Thornburg Mortgage Inc. lost $2.75 billion in the first three quarters of 2008.
Jumbo loans are the type of mortgage that caters to only a handful of borrowers mainly because of the size of the loan itself. In a recession, the wealthy are also subjected to the economy’s backlash although there are still those few who can go unscathed. There are still many homeowners in expensive areas whose home loans remain too large for Fannie Mae or Freddie Mac to insure. So some are saying the jumbo loans aren’t dead even if companies like Thornburg have raised its white flag. In an article from Businessweek, jumbo loans are believed to be making a comeback. It states, “Some wealthy buyers might have a little less money to spend on real estate if Congress passes a measure to tax heavily the bonuses for wealthy employees of banks that received taxpayer bailout money. Still, the news is good for qualified borrowers in expensive markets such as Boston, New York, and Washington and in states such as California and parts of Florida where many homes require loans larger than those Fannie Mae, Freddie Mac, and the Federal Housing Administration are permitted to buy.”
If this is indeed true, we want to see the following happen so that the claims above can bear some evidence:
First, even though only a few companies are offering jumbo loans these days, we’d like to see them originate these loans and seek out more customers.
Second, more borrowers can qualify for the loans given the high income requirements with W-2 tax forms and tax return verification. This can also be possible if they maintain FICO scores higher than 660.
Third, borrowers reduce their risk of defaulting even if payments on principal, the interest, property taxes, insurance or fees and assessments amount to thousands of dollars. That’s working well on their monthly incomes in a period of tight consumer spending.
Finally, a large modification of dangerous option ARMs is of the jumbo type. We all know the story behind this and we’d like lenders to take their part in reforming the industry.