Tuesday, April 12, 2005

Jumbo Loans Now Mostly ARMs, Interest Only

This S&P report (see "Trends" #4, pdf) has some data about jumbo mortgage origination. "In fourth-quarter 2004, interest-only (IO) loans and traditional ARM loans accounted for more than 55% of the prime jumbo loans securitized. This figure is up sharply from fourth-quarter 2003, when it represented only 12% of the securitized loans."

And some predictions for the industry as a whole. "Standard & Poor’s expects a drop in dollar volume of mortgage originations and loan securitizations by approximately 15% to 20%. We predict the dollar volume of mortgage loan originations and issuance to be off approximately 30% from $225 billion in 2004 to $160 billion in 2005."

This continues a trend that has been in place since 2003. Sure, prices go up but less and less cash flows into the market. The industry has reacted by chasing the sub-prime buyer, but that hasn't stopped the overall decline.

9 Comments:

At 6:59 PM, Blogger Dan said...

Silly question: How much loan is a jumbo loan? And is it the same in every part of the country?

Dan

 
At 7:49 PM, Anonymous Anonymous said...

In California jumbo loans are anything over 359,650.00. Caps may vary by state.

I agree with a post I saw on another blog. This is the bigest pyramid scheme ever perpetrated in the history of the world.

 
At 9:00 PM, Anonymous Anonymous said...

Ben,

I need your help buddy. I need to understand what makes the incredibly low 30-year bond rates so atractive to investors. Is it that there is no other investment tool that would deliver a meager 5.65% return over 30 years? What happens if a year or two from now the rate goes up to say 7.5%, are the lower priced bonds pretty much worthless? Can they be cashed out?

Just trying to figure out why there is such a seemingly endless stream of money into such a seemingly poor investment tool.

 
At 9:33 PM, Blogger Ben Jones said...

(Just trying to figure out why there is such a seemingly endless stream of money into such a seemingly poor investment tool)

The Fed is creating money like mad. Right now, thay pay you to borrow.

 
At 10:24 PM, Anonymous Anonymous said...

Bond and stock markets have been pointing in different directions for several years now. Bond market says era of diminished expectations lies ahead. Stock market says it's blue skies forever. I think bond market is correct. If so, then 5.65% is perfectly reasonable for treasuries, assuming average inflation of 2.5%, which is about what Fed target range is.

Second, carry-trade is big nowadays. Long-term bonds will NEVER again yield more than 4% above overnight rate, and usually spread will be less (at most 2%). Carry-trade is recent innovation, and requires computer technology which wasn't available until about 10 years ago.

 
At 11:08 PM, Anonymous Anonymous said...

Low long-rates could also be a consequence of China (and Japan, for a while) stuffing dollars into bonds to maintain their peg. If they stopped, the difference in interest would likely be noticeable.

China buys to maintain a peg, not because they like the returns. It also gives them leverage over us.

 
At 12:00 AM, Anonymous Anonymous said...

China/Japan only buy short-term bonds, mostly T-Bills. I believe Fed reports show this. Long bonds is hedge funds doing the carry-trade.

 
At 1:36 PM, Blogger dwr said...

"In fourth-quarter 2004, interest-only (IO) loans and traditional ARM loans accounted for more than 55% of the prime jumbo loans securitized."

At first I didn't appreciate what "traditional ARM loans" meant. Those are ARMs with no fixed rate period. I cannot believe how irrational the vast majority of people are being.

 
At 1:39 PM, Blogger dwr said...

So 55% of people are taking out IO or traditional ARM loans, another decent chunk are taking out hybrid ARMs, and maybe 15-20% are taking out traditional, fixed rate loans? And this is nationally. I can only presume how many people are doing this in California.

 

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