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Jumbo Market Lives; Inflation = Windfall; Why Lenders Are Terrified of Forbearances

A mortgage servicer employee wearing a suit, walks along a wall of windows, where other people are congregated, overlooking a skyscraper where a mortgage bank which handles loan forbearance is locatedI am repeating this b/c I am still getting so many questions: The Jumbo Market Definitely Lives.

Jumbo buyers with 20% down can buy up to $1.6 million in CA and up to $1.4 million in Texas with 1st/2nd Combo Financing.

I recently blogged about combo financing here.

Traditional jumbo lenders remain in the marketplace too but rates are about 1% higher than conforming rates.

We are recommending Adjustable Rate Mortgages (ARMs) again, as they provide tremendous payment and interest rate relief.

INFLATION = WINDFALL FOR HOMEOWNERS WITH LOW FIXED RATES

Currently, we face significant deflation with falling oil, airline ticket, gas, and all kinds of other prices as a result of plummeting demand.

But, as I mentioned, all the new money creation could very likely result in significant inflation after the COVID-19 crisis ends.

On Friday, I mentioned how real estate, as a hard asset, is a great inflation hedge but I forgot to mention another great reason to buy prior to the onslaught of inflation.

Buyers can pay off debt with dollars that are worth a lot less than they are currently.

This is what happened in the 1970s. Homeowners who bought in the 1960s were able to quickly and easily pay off their 3%+ 1960s loans with very cheap inflation-ravaged dollars in the 1970s.

This was a tremendous windfall for homeowners in fact.

WHY LENDERS ARE TERRIFIED OF FORBEARANCES

As the onslaught of mortgage payment forbearance requests continues to roll in, I want to mention again why this is so terrifying for the entire mortgage industry.

Recently funded loans: If a loan goes into forbearance right after funding, the lender that funded it could either have an unsalable loan or be faced with a loan-buyback (if the loan was just funded AND sold). Mortgage banks can only make money if and when they sell their loans. They are not allowed to let their loans “sit” on their warehouse lines of credit too. Hence, they have to sell every loan. And if a loan is in forbearance, they have to sell that loan at a huge discount, subjecting themselves to massive losses that could easily put them out of business.

If a mortgage bank funds 1,000 loans per month, and 5% of them go into forbearance soon after funding, that mortgage could face losses of a few million dollars – wiping out profits and available cash.

Loans funded over six months ago: When these loans go into forbearance, it is the servicer that is at risk b/c servicers have to make payments to the investors/noteholders/bondholders (whatever you want to call them) whether the borrowers make payments or not. This of course threatens to put many servicers out of business.

There is a government rescue package in place but it is still too little and too late, so the risk of forbearances is keeping the entire industry on edge.

No firm is sitting on enough cash to even come close to absorbing the potential demand for cash without government help.

We continue to encourage anyone interested in forbearances to visit our Forbearance Resource Center. We update it regularly and it is chock full of helpful info.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167