What happened to new jumbo loan limit?

NEW -> Contingent Buyer Assistance Program
Amen, lendingmaestro.

awgee, if you can afford to buy a house in CA with cash on the barrel head, more power to ya.

xsocal land merchant, no prepay penalty on most short-to-intermediate term ARMs.

The practical reality is that many mortgage purchasers make an emotional decision when selecting a 30 year FRM. Thirty years is an arbitrary term--built into the mortgage system by whom, I don't know--for those who don't have the discipline to manage debt the same way they manage assets: by the numbers. Far be it for me to minimize the emotions involved in debt. I'm simply pointing out that there may be better ways to purchase a home and that 30 year FRMs are an anomaly unique to the United States.
 
David Lereah ???

I am glad some reads the 1994 article I post, and realizes the douchebag was chief fake economist of the Mortgage Bankers Assoc. Amazing, they must have fired him for not be a shill, and telling people to be cautious of ARMs.
 
"The practical reality is that many mortgage purchasers make an emotional decision when selecting a 30 year FRM. "

But they are being wise and practical when using other forms of financing?
 
SCG,

According to Tanta @ CalculatedRisk :

"In the very distant past (just before and during the Great Depression), most mortgage loans were balloons of this type or were interest-only loans with very short terms (a year was common). Why were IOs and balloons the only loans available back in the day? You have to remember that this was long before the invention of the ARM, or a mortgage loan that can “reprice” its interest rate to market without having to actually pay off an old loan and start a new one. Banks and thrifts that funded mortgage loans with deposits had the same problems back in the old days with interest rate risk that they have now: if you make a very long-term loan at a fixed rate of interest, you might find at some point before that loan pays off that prevailing interest rates paid on deposits have increased on you. You therefore have a loan out there earning you, say, 5%, and depositors expecting you to pay them 6%. That is called a “negative interest margin” or “the road to bank failure,” depending slightly on context. Even if you are not experiencing pressure on deposit rates, back in the thrift days of loans funded exclusively with deposits, you might find (It’s a Wonderful Life) that you just have all your assets tied up in slowly-repaying loans when your depositors want cash from you. That’s the classic “liquidity” problem. You will want to bear it in mind in any discussion of whether “the end of securitization” might come, or might be a bad or a good thing.

Offering only short-term loans that had to be renegotiated (refinanced) every year was a way to manage the asset-liability problem and keep things sufficiently liquid. It was, therefore, like the modern ARM, a form of risk-shifting: the interest rate and liquidity risk was taken off the banker and placed onto the borrower. It (more or less) kept the banks solvent and liquid, but it rather famously created a nasty trail of foreclosures when suddenly borrowers just couldn’t find a lender to renegotiate those maturing loans, and didn’t have the cash to pay them off. (Sound familiar? Yep.)

Without straying too far into the history of the mortgage in the U.S., suffice it to say that the big innovation coming out of the New Deal legislation that formed FHA and, subsequently, the old Federal National Mortgage Association (which turned into Fannie Mae, the GSE, rather later) was the fully-amortizing long term loan. At first the new thing was the 10-year loan, then the 20-year loan, then the 30-year loan. (Several decades later, you notice, we’re on the 40-year and even 50-year loan.) So this thing that Americans think of as the “traditional” 30-year fixed rate loan isn’t, in the big picture, all that old."

We chose a 30 year FRM based on stability, not emotion. We, as borrowers, have far more options than with any form of ARM. We can double up payments, we can (theoretically) withdraw equity, we can pay off at any time with no penalty, and the lender gets to do nothing but accept the pre-arranged payments. Compared that to a borrower with an ARM: they can choose their payments but eventually they have to pay more than that and little control over when those payments rise, their rate might reset lower but it can also reset much higher and they have NO control over which way it goes, their equity (based on their intial payments and the reset rate) can be unaccessable in the future due to income and interest rates on their ARM degrading their chances at another loan or HELOC. All of that sounds like a recipe for some extreme emotional distress in comparison with a boring 30-year fixed rate mortgage. Our was a practical decision, not an emotional one.

You're a mortgage broker, aren't you.
 
Just to provide a practical example of the discipline strategy, we took an interest only 5/1 (jumbo) on our current house, as well as a variable-rate home equity loan to make up the rest of the 20% down that we didn't have at the time. The time was right for us to buy, and we had the income for the monthly payments, we just hadn't saved up a full down payment.

While the interest-only option was .125 more expensive, we liked that it gave us more flexibility month-to-month, in case we wouldn't have had enough for a normal principal+interest payment in any given month. Most months, we ended up paying much more than what the normal interest+prinicipal payment would have been (no penalties for doing this). All payments went to the higher rate home-equity loan principal. By doing this and also sending in additional big lump payments when we had saved up some additional surplus or gotten bonuses at work, we were able to completely pay off the home equity loan in about 2 years, much sooner than if we would have paid the minimum payments on a normal principal+interest loan. The best part of this is:

If we were to keep our current strategy and then continue paying off the mortgage, we could probably pay it off within 5 years, meaning we'd have owed money on our house from the purchase date for a total of 7 years. In my opinion, it was a better decision to go with the lower interest rate (4.875% on the mortgage) with the 5/1 ARM, than to pay the higher interest rate we would have been stuck with if we'd taken the 30-year fixed rate. Either way, we would have paid off the house in ~7 years total, so we figured it would be better to pay at 4.875% for 5 of those years than the 5.5% 30-year fixed rate for all 7. The 4.875% would go up to at most 6.875% after 5 years (2% cap per year), and then at most 8.75% after the 6th year. By then, the balance would have been so low, the higher rate wouldn't have been a big impact. And we could have also refinanced at any point if lower rates became available.

When house values were going up, making overpayments seemed like a good strategy. However, they stopped going up and started rapidly declining, so after we paid off the home-equity loan, we just started saving the surplus instead of putting it toward the mortgage (other than the required interest-only payment, which we continued to pay). With plans to sell the house and move up, we would have lost more money by paying down the mortgage principal (even though the monthly interest-only payment we'd owe would go down with each principal payment).
 
Nude, yes, I'm a mortgage broker, but I'm also a consumer, as you are--a purchaser of loans for my own properties. I selected an ARM (several) for reasons similar to giltee's very sound approach. You based your choice on stability, which sounds emotional to me; that is, your fear (emotion) that rates will only move against you. Not that there's anything wrong with that--people make emotional financial decisions all the time.
 
It wasn't fear. It was judgement based on experience. Rates were lower than at any other time in my life and experience told me that that wasn't going to remain the case for the next 5 years. Why bother betting on a "maybe" when I could lock in a "sure thing" and forget about what happens with the rate. Using your definitions, I must also have feared losing my girlfriend, which is why I got married.

For the record, we did take out a piggy-back HELOC that was tied to LIBOR. We paid it off in 13 months. It was a useful tool that allowed us to buy in a more central location than we would have gotten had we just used our saved down payment. When it was paid off, we were left with our 30YFRM and discretionary income. That decision wasn't based on fear or lack of it, it was based on our ability to pay.
 
Nude

"Rates were lower than at any other time in my life and experience told me that that wasn't going to remain the case for the next 5 years. Why bother betting on a "maybe" when I could lock in a "sure thing" and forget about what happens with the rate."

This was a point that I made in another thread about people whinning because their adjustables rates rose. If they took adjustables when fixed rates were historically low then the odds were that the adjustables would increase. If fixed rates were at 12 or 14% then the odds would be that the rates would decline.

I have had a hard time understanding why people would be surprised that rates increased from historical lows. They only had one way to go and it was UP!

You prove that adjustable rates, HELOcs, and low downs are not in themselves bad but most people did not use them correctly. Could this have been their own fault?

SoCalGal

Thanks for the response on the Prepays.

Regards
 
"You based your choice on stability, which sounds emotional to me; that is, your fear (emotion) that rates will only move against you."

If I was a bettin' man, which I am, (but I only bet when I think the odds are with me), and I had to bet which way mortgage interest rates are more likely to move ...
 
If you'll forgive the platitude, I suppose the "right decision" for each buyer depends on his or her individual situation. For us, we forecasted rates rising as well as most people did, but we took the calculated risk that we could pay off the balance before the maximum stated rate increases (2/2/5 for our loan) would have netted a greater overall interest payment to the bank. I suppose this is the decision people make every day when they take loans, akin to deciding whether to pay points to lower the rate. As part of the risk calculation, we recognized that we might under certain circumstances have ended up paying X more in interest if we couldn't pay it off exactly as we'd hoped/planned, compared to if we'd taken the 30-yr fixed rate at the time, but counterbalancing that risk for us was the fact that at least for the first 5 years, we'd have more money in hand to work with due to the lower rate w/ the 5/1 ARM.
 
giltee, I didn't mean to imply anything negative about your choice. I was disputing SCG's statement that choosing a loan was an emotional decision rather than a pragmatic one. Calculating interest payments versus principle payments might become an emotional thing for some people, but (for those same people) so would calculating bond yields. That doesn't mean they are a majority of mortgage borrowers, just that some people get emotional over math
 
giltee

You are correct that "the right decision depends on each buyers individual situation." ARMS, HELOCs, low downs, all have their place. It seems that most folks either didn.t believe rates would increase or if they had a plan they didn't execute it all that well. You thought it out and stuck to your plan. Congratulations!

As a side note I had a home paid off and put a $400K LOC on it for 4 years. I never had more than 80K owed and used most of it to improve the home prior to sale. It was very hard not to write a check for a Shelby GT500 but I didn't. It comes down to self control and the government can't legislate that.

Homeowner Equity is Lowest since 1945 shows how many people are upside down in their homes. When I see that a person or family who have owned their home for 10 or more years are upside down then I have to believe that stupidity or greed had to be involved.

Also when people "invest" in a primary residence then they are off on the wrong road. Investment property should be other than your primary home. That is another 'big lie" of the recent bubble as is "freeing up the equity". There is nothing for free as many are now seeing.

Maybe I am slipping from the "Resident Bull" position here! Even going to the dark side with awgee and Trooper!!

Regards
 
C'mon xsocal, don't deny yourself. You know you have it in you. Let it out. It will feel so good. You know you want to.
 
xlm,

there are fringe benefits to our way of thinking:

assgrabbery2-4940n0i62.jpeg
 
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