One casualty of the mortgage crisis that we’ve covered here before is the jumbo mortgage — loans over $417,000 in some jurisdictions and over $729,000 in others.  If you are (or were) a millionaire with a big house and a big mortgage, chances are it was a jumbo.  In the mortgage bubble days jumbos generally carried a half-percent interest rate premium over conventional (non-jumbo) loans. Then all heck broke loose and jumbos disappeared entirely only to reappear recently, though after a somewhat different fashion.

Lenders are leaping into the jumbo mortgage business and offering aggressive rates — easily as aggressive as in the bubble days in terms of rate premiums.  But there’s a catch.  The catch is that jumbo mortgages today are a lot harder to qualify for than they used to be.

Want a jumbo loan?  Then be ready to make a 30-40 percent down payment on your new house.  This immediately eliminates refinancing most of the older jumbo loans in California, for example, where more than half of the mortgages were already of jumbo size.  If your jumbo mortgage is underwater don’t expect to be able to refinance — or even to apply for a mortgage modification, since the Obama plan, for example, doesn’t even cover jumbos.

The reason lenders are jumping into jumbo mortgages is because under these terms it is a great business.  Wall Street still won’t touch jumbos for securitization, but that doesn’t matter because the banks are tending to hold these loans in their own portfolios.  And for good reasons: 1) the lenders have plenty of equity down so the properties are worth more than the loans against them; 2) it costs little more to foreclose on a jumbo than on a conventional loan so for the lender the downside is the same while the upside is much larger, and; 3) under current Fed policy the banks are making these 6-percent jumbos with 0.25-percent money — a fantastic spread by historical standards.

So welcome back jumbo.  Too bad most of us can’t qualify.

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It takes months or years to decide to move or to buy a first home or a new one.  It takes weeks or months to find a new home once that decision is made.  It takes days or weeks to get a mortgage and move-in.  NOTHING about buying or selling a home is fast in a normal (non-bubble) market and we are DEFINITELY in a non-bubble market.  Yet that market seems fixated this week on two thoughts: 1) that the housing market has hit bottom (it hasn’t), and; 2) that mortgage rates have peaked (they have — for now). These short-term effects are probably NOT the correct things for Americans to fixate on at the moment, however, because the housing crisis is far from over.

Mortgage rates that had risen close to a point on average over the last few weeks have subsided in the last few days by about a quarter of a point.  Homebuilders, who are in a very justified panic in any case, are breathing slight sighs of relief that are probably not justified.  The storm of mortgage refinance that had been driven by sub-four percent rates has subsided but may now resume, though with less intensity, as rates drop back a bit further.  But against this we still have more than eight percent of U.S. homes in foreclosure — nearly all homes that WILL BE LOST.  This can only have the effect of driving down prices further.

Yes, the recession may be easing when measured in terms of stock prices (always a leading indicator) or corporate profits, but housing can only go lower and a huge part of the U.S. economy measured in skilled jobs is dependent on housing, so we’ll see employment remain depressed, too.  The Fed will keep buying mortgage securities, driving interest rates back down a bit, and it will be increasingly a buyer’s market for months to come.

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Banks don’t like home foreclosures.  Though losing your house is the inevitable result of failing to pay your mortgage that doesn’t mean bankers look on foreclosures as a way to make money.  Just the opposite; they lose money on almost every one.  There are legal costs, administrative costs, the loss of revenue (you’ve stopped paying, remember?), and because the eventual resale is rushed and distressed, the bank often sells for less money overall.  Add to this the fact that homes sit empty for months while the system churns away and there are issues of wear-and-tear or even vandalism.  Banks HATE foreclosures.

So there is a real incentive for lenders to work with homeowners to keep them in their homes through mortgage modifications.  Even though a modified mortgage costs lenders money through reduced payments, the cost is nearly always less than it would be if the property was foreclosed.  It’s simple math: if your lender loses less through modification, then they won’t foreclose.  Or that’s the way it is supposed to be.  Unfortunately there are way more foreclosures than ought logically to happen under these rules.

This happens for two reasons.  Foreclosure is an EXTERNAL process handled mainly by outside lawyers working for the bank and there is always another lawyer.  So foreclosure is a process that SCALES — it can grow or shrink as needed.  Mortgage modification, on the other hand, is an INTERNAL process handled by the lender and there isn’t a lender in America who was prepared for an 8.1 percent default rate.  Many foreclosures are happening simply because the banks don’t have the trained manpower to do anything else.  That’s crazy.

But there is also a reason built into bank accounting rules why we have so many foreclosures and so few mortgage modifications.  If a lender modifies your mortgage the new reality of that arrangement is supposed to be reflected in the bank’s financial statements IMMEDIATELY, while the even greater hit to the bank’s books of a foreclosure only has to be reported EVENTUALLY and often hits a year or more after the event.  Bankers prefer some flexibility in giving bad news so even though foreclosures are worse for everyone in absolute terms, the lender will often opt for a foreclosure anyway.

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It’s like George Soros versus the Bank of England all over again, only this time it’s hedge funds versus the U.S. Treasury and Federal Reserve.  And the real loser in this rigged game is the U.S. taxpayer.

Soros made more than $1 billion back in 1992 by shorting the British Pound in a bet that the UK government would continue to support the currency at almost any cost.  And they did, for awhile, just as the Chancellor of the Exchequer said they would (Soros believed him). By the time the Bank of England threw in the towel, finally allowing the currency to float, Soros’s $10+ billion bet had made him a billionaire in only a few days.

Jump across the Atlantic now to this week when U.S. bond rates have been edging-up, which is what Fed Chairman Ben Bernanke says he doesn’t want to happen.  Bernanke wants mortgage rates to stay low and to make sure that happens he has the Fed buying, buying, buying Treasury securities.

Bond prices and yields move in opposite directions. When investor demand falls, so do prices, pushing up yields. And as investors shun the safety – but relatively low return — of government-backed debt, the impacts are felt throughout the credit markets. Of concern to the Fed, and what has led Chairman Ben Bernanke to increase Treasury purchases in the past, is the effect this dynamic has on mortgage rates.

The way the Fed overcomes this problem is by printing money which is used to buy Treasuries at prices higher than they are actually worth, pushing yields artificially down, which is exactly what’s happening this week.  The Fed is effectively forcing money into the pockets of hedge fund managers.

A mortgage is nothing more than a long term bond, given to a borrower to purchase a home. So when lenders get fearful they’re not being compensated for tying up money for as long as 30 years, they increase rates. Further, as the specter of inflation rises, lenders demand bigger interest payments to keep up with higher prices. In other words, when dollars in the future are worth less than dollars today, banks demand higher payments to make up the difference.

Keeping mortgage rates low has been a cornerstone of Washington’s efforts to jump start the flagging housing market. But with rates at the highest level since April, the “smart money” has been betting the Fed may return to the Treasury market en masse.  And now the Fed has.

According to Bloomberg, big money managers like Blackrock are betting the Fed will step in to support the Treasury market (again), as regulators hope renewed Treasury purchases will push down mortgage rates (again).

When Soros took the Bank of England for more than a billion pounds back in 1992 it was considered a good thing, a master stroke, a huge risk that really wasn’t.  It was clever. But now that 100 times as much money is being thrown at a similar circumstance in the U.S. with inevitably similar results, it can only be seen as one thing — looting.

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Mortgage rates are still near historic lows yet hardly any applicants actually qualify for those rates due to a variety of additional points and fees that we've covered in this space before. This effect is masked, to some extent, by the fact that these additional costs are generally NOT mentioned in the weekly report of average mortgage rates issued every Thursday by Freddie Mac. Those rates — as low as 4.48 percent in the last report for a 15-year fixed mortgage — generally show just the core rate and not the various adders. So you can have great credit and qualify for that 4.48 rate, but actually GETTING it is something else altogether.

There is also a fight brewing between the government, banks, and mortgage security holders over provisions in new legislation that would immunize loan servicers from lawsuits by investors in mortgage-backed securities. The government wants to encourage loan modifications, allowing these to happen almost automatically in cases of bankruptcy, where they were traditionally not allowed. To date all mortgage modification programs have been aimed mainly at those current on their loans which includes an entire class of homeowners who don't really need loan modifications to stay in their homes. So the government is doing the right thing, so to speak, but with typical governmental lack of finesse.

The banks hated this idea until they figured out that it would allow them to reconfigure $441 billion in second mortgages THEY hold. Citibank was the first to see this logic. So the banks can improve their positions as loan holders, can improve their positions as loan servicers, but of course the mortgage security investors hate this and the government sits in between. The result of this conflict will only be more delay and confusion in the marketplace, neither of which is good for homeowners. Sorry.

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March 18, 2009 — U.S. mortgage applications were up last week, driven by demand for refinancing as 30-year fixed-rate mortgage rates fell, the Mortgage Bankers Association said today.

Refinancing applications jumped 30 percent in the week ended March 13 as the borrowing rate dipped 0.07 percentage point to 4.89 percent, tying the record low reached in early January in a survey that dates to 1990.

But purchase applications continued to lag those for refinancing, rising just 1.5 percent in a buyers market.

Home loan rates have fallen as the government has purchased more than $250 billion of mortgage-related assets and announced unprecedented steps to stabilize the deepest housing slump since the Great Depression.

A year ago, the average rate on a 30-year mortgage was closer to 6 percent.

The Federal Reserve purchases of mortgage-related assets is nearing the half-way mark targeted by the end of June to help cut mortgage costs and revive housing. The programs are widely expected to be expanded to bring borrowing costs down, stimulate purchases and help struggling homeowners to refinance and avert foreclosure.

Refinancings requests represented about 73 percent of all mortgage applications last week.

Fannie Mae (FNM.N) (FNM.P), the government-controlled home funding company, on Wednesday said its February refinancing volume nearly tripled from January to more than $41 billion.

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The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan decreased 15.1 percent to 743.5 in the week ended Feb. 20 from 875.3 in the prior week. The group’s refinancing measure dropped 19.1 percent and the purchase index slipped 2.6 percent.

Owners may be waiting for President Barack Obama’s $275 billion plan, aimed at making refinancing easier, to go into effect early next month. Even so, ongoing declines in prices and rising inventories signal no end in sight to the housing crisis at the center of the longest recession in a quarter century.

The refinancing gauge decreased to 3,618 after surging 64 percent to 4,472.9 a week earlier. The mortgage bankers' purchase index fell to 250.5 from 257.3.

The average rate on a 30-year fixed loan climbed to 5.07 percent from 4.99 percent the prior week, the second-lowest level on record. The rate reached a record-low 4.89 percent in mid- January.

Mortgage rates have plunged since early December when the Federal Reserve announced it would buy Fannie Mae, Freddie Mac and Ginnie Mae-backed mortgage securities. The move pushed down yields on the mortgage bonds relative to Treasury notes.

The share of mortgage applicants seeking to refinance loans decreased to 69.7 percent of total applications from 74 percent the prior week.

The average rate on a 15-year fixed mortgage rose to 4.71 percent from 4.66 percent the prior week. The rate on a one-year adjustable-rate mortgage climbed to 6.13 percent from 6.10 percent.

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