Home Mortgage loan Giant home loan arrangements close to pre-2008 crisis levels

Giant home loan arrangements close to pre-2008 crisis levels

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Home prices in the United States weren’t the only thing to soar during the pandemic.

Large “jumbo” US residential mortgage creations that exceed “compliant limits” set for housing giants Freddie Mac and Fannie Mae could reach $ 550 billion this year, a level not seen since the 2008 financial crisis, have writes researchers at BofA. Monday, in a weekly report.

They totaled around $ 283 billion in jumbo creations in the first half of the year, putting annual volume within reach of a post-crisis record. With the surge, “a significant portion” was held in bank portfolios, but an increasing portion was also securitized, or packaged and sold to investors in the form of private mortgage bond deals (see graph).

Jumbo home loan arrangements are booming.

BofA Global

Unlike the nearly $ 7.8 trillion agency mortgage-backed securities, MBB,
-0.09%
The riskiest and much smaller $ 780 billion private label market, dominated by jumbo lending in recent years, lacks government guarantees.

Jumbo home loans primarily go to borrowers with blue chip credit scores who need financing above the compliant limit set for housing giants Freddie Mac FMCC,
-0.01%
and Fannie Mae FNMA,
-3.36%.
This is currently around $ 548,000 for single-family homes in much of the United States, but closer to $ 820,000 per home in New York City, San Francisco and other high-cost areas. These levels can increase every year.

Several public mortgage lenders, including PennyMac PFSI,
+1.07%,
in recent weeks, they have announced that they will offer borrowers confirming loans up to $ 625,000, a level expected to meet new federal guidelines for 2022, which are expected to be announced in november.

The race to make large loans on expensive homes comes as house prices rose during the pandemic, up nearly 20% from a year ago, in July, while hitting new ones records in many cities across the country.

Read: Home prices rise at record pace for 4th consecutive month, but economists are not worried about the housing market – yet

Giant mortgage bond issuance this year has already hit a post-2008 record of $ 38 billion, with $ 45 billion likely by the end of the year, according to the BofA team, who noted a broad investor base for private label mortgage bonds, but also low credit loss and “strong” origination guidelines.

It’s been about 15 years since Wall Street fueled a boom in leveraged mortgages to risky borrowers and a series of exotic housing-related derivatives that imploded when house prices fell, bringing down the investment bank. Lehman Brothers and causing a wave of European bank bailouts.

Since then, regulators have asked the big banks to hold more capital against possible loan losses, but also briefly during the pandemic they have been temporarily barred from repurchasing their own shares.

Investors will wait to learn more about the credit terms of senior executives at JPMorgan Chase & Co. JPM,
-2.10%,
Bank of America Corp. BAC,
-1.26%
and Citigroup Inc. C,
-0.93%
when they launch the quarterly results this week.

Credit in the US real estate market has grown, but remains relatively tight since millions of US homes were foreclosed. Qualified borrowers have recently been able to secure rates on 30-year fixed home loans of less than 3%, a reduction in costs offset by the affordability crisis many first-time buyers face.

Wall Street widely expects the Federal Reserve to outline its plan in November to cut its $ 120 billion in emergency monthly purchases of Treasury and agency mortgage-backed securities, a way to cut its Monetary largesse as the US economy recovers.

Signs that longer-term borrowing costs could be higher for the US economy can be attributed to the 10-year Treasury rate TMUBMUSD10Y,
1.611%
recent rise to 1.6%, its highest level since June, according to Dow Jones Market Data.

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