Giant home loan arrangements close to pre-2008 crisis levels

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

Origins of large US “jumbo” residential mortgages that surpass “Compliant limits” Housing giants Freddie Mac and Fannie Mae could reach $ 550 billion this year, a level not seen since the 2008 financial crisis, BofA researchers wrote in a weekly report on Monday.

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 as 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,
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,
and Fannie Mae FNMA,
This currently works out to about $ 548,000 for single-family residences 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,
in recent weeks, they have announced 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 roughly 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, pushing down Lehman Brothers investment bank and causing a wave of bank bailouts in the United States and Europe.

Since then, regulators have asked big banks to hold more capital against potential 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,
Bank of America Corp. BAC,
and Citigroup Inc. C,
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 could recently get rates on 30-year fixed home loans below 3%, a reduction in costs offset by the affordability crisis faced by many first-time buyers.

Wall Street widely expects the Federal Reserve to outline its plan in November to cut its $ 120 billion in emergency monthly Treasury and agency mortgage-backed securities purchases, one 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,
recent rise to 1.6%, its highest level since June, according to Dow Jones Market Data.