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Three Cents Worth: Cash for Jumbo Real Estate

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[This week, real estate appraiser, Curbed graph guru, blogger, and podcaster Jonathan Miller thinks about conformity.]

Here's a two-fer on mortgages. I was doing some analysis on the market impact of the looming October 1 drop in Fannie Mae's conforming loan limit to $625,500 from $729,750 and had a mortgage data set lying around (2011 aggregated mortgage data wasn't yet available) so I thought I'd share. Incidentally, the drop of the loan limit is not catastrophic to the Manhattan housing market, but it certainly isn't helpful. Based on the sales over the past year, around 7 percent of the sales would have been moved to jumbo, facing higher down payment requirements, higher rates and FICO and other tighter underwriting requirements. Some of the sales could fall apart due to credit but it would be unlikely that all of them would.

So, to the charts!

The loan-to-value ratio (gray columns) is just above 64 percent, down from the pre-Lehman peak of 69 percent. While the scale of my chart shows a sharp LTV decline (decline in LTV means more cash and lower mortgage required), it still remained within a relatively tight 5 percent range over the past five years. The average purchase that had a mortgage had 2/3 of the purchased financed. This is consistent with the average co-op requirement of 35 percent cash.
The average sales price of a purchase with a mortgage (red line) and the average sales price of all transaction with a mortgage or all cash (blue line) are substantially different, meaning a whole slew of purchases at the high end are being made with cash.

The bottom chart simply shows the market share of each type of mortgage?the limits are what are in effect now.

·Conforming mortgages (deep blue): the dominant mortgage type in the U.S. It's been hovering at 60 percent market share for 3 years until dropping sharply at the end of last year. That seems to coincide with the higher end market wake-up that started last year at this time. The conforming mortgage decline is offset by the jump in jumbo activity (grayish blue).

· Jumbo-Conforming mortgages (light blue): The hybrid created by Fannie Mae when the credit crunch began?it sits between the jumbo and conforming mortgages and was supposed to help high priced housing markets like NYC metro. It's been at a constant level since Lehman.

· Non-Conforming (Jumbo) mortgages (grayish blue): The jumbo and conforming mortgages were at roughly 50/50 during the peak (sales) of the housing boom in early 2007. The drop off in jumbo reflects the limited number of jumbo lenders out there?lenders can't sell jumbo paper to the secondary market since it blew up in the credit crunch. Jumbo lenders must hold the mortgages in portfolio, tying up capital to lend more. Since they can't offload the risk to the Icelandic banking system or unwitting school districts in Alabama, the standards for lending are much harder than conforming.

As they say, it's complicated.
· Matrix [matrix.millersamuel.com]
· Three Cents Worth archive [Curbed]