Jun272012

Jumbo loan owners have no hope of a bailout

Most people assume the relative lack of must-sell inventory at the high-end of the housing market is because fewer borrowers at these price ranges are distressed. Nothing could be further from the truth.

So why have we seen so few foreclosures?

Amend-extend-pretend. The banks are choosing squatting over foreclosure. With little government support and no political support for a bailout, the neighborhoods with house prices in excess of $800,000 are only maintained by the legions of unforeclosed delinquent mortgage squatters. With no pressure from regulators to mark their loans to market value, and with near zero cost of money, banks plan to wait until demand returns to this segment. With no home equity from the lower rungs of the housing ladder, a weak economy, slow job creation, and no incentives to save, banks may be waiting a very, very long time.

Refis on underwater jumbo loans nearly impossible

Carolyn Said — Updated 06:44 p.m., Saturday, June 23, 2012

Jeana Pieralde and Diana Tierney did everything right when they bought their Pleasant Hill house in 2006, choosing something they could afford and making all payments on time.

Now, however, they’re trapped in a mortgage with a 6.375 interest rate – sky-high compared with current rates, which average 3.7 percent – and they can’t refinance because their house is underwater and their jumbo mortgage is excluded from government plans for underwater refis.

So if they could afford the original mortgage, what’s the problem? The basic premise of this article is erroneous. These borrowers have no real problem, they just want a better deal.

Their dilemma is shared by huge numbers of Bay Area residents who bought homes with “jumbo” loans before the real estate market tanked.

“It makes me sick when I think about it. We could save between $800 and $1,200 a month,” said Pieralde, who works in information technology security for the city of San Francisco. Tierney is a social worker for Contra Costa County. “We have tried every avenue over the past four years to try to refinance our home. I call about every three months trying to do something.”

If it makes her sick when she thinks about it, then perhaps she shouldn’t think about it. Refinancing is not an entitlement. She should be happy she was smart enough to borrow within her means and can comfortably make the payments.

‘Nothing you can do’

The four-bedroom split-level they bought for $799,000 has plunged in value to $566,000 – and they owe $648,000. Their paychecks as government workers have shrunk from contractual changes. The couple, who have perfect credit, don’t want to blemish it by walking away from the house or doing a short sale.

Government workers in California can afford $800,000 homes? Obviously, they are overpaid.

“I have so many clients who are in that position” of being unable to refinance an underwater loan, said Fif Ghobadian, a broker with Guarantee Mortgage in San Francisco. “There is nothing you can do; it’s a brick wall.“

So what? Should taxpayers bail out people with jumbo mortgages? Who is going to vote for that one?

During the housing boom, almost 60 percent of Bay Area housing loans were jumbos – mortgages above the former limit of $417,000, according to San Diego real estate service DataQuick.

The prevalence of jumbo loans in coastal California explains much of the lack of foreclosures. The GSEs and the FHA are promptly processing their foreclosures. The banks are sitting on their bad loans.

Refinancing at a lower interest rate provides a sort of household economic stimulus. “If you have that extra money in your pocket, obviously you’d be spending more, and it makes life more comfortable for people,” Ghobadian said.

That economic stimulus effect inspired the government to expand its underwater refinance program. HARP 2.0, which went into effect this year, lets Fannie Mae- and Freddie Mac-backed mortgage holders refinance no matter how underwater their homes are. But Fannie and Freddie only back “conforming” or non-jumbo loans, leaving holders of jumbo loans with little recourse. And efforts to remedy the problem through legislation have gone nowhere.

And such efforts will continue to go nowhere. Imagine how people in flyover country would feel about subsidizing California jumbo loan holders.

“There is not much that can be done legislatively for loans that are not agency-backed because they are covered by individual private contracts,” said Guy Cecala, publisher of Inside Mortgage Finance in Maryland. “Servicers will tell you they don’t know who the investors are. It’s very frustrating when you hear that kind of thing, but very common.”

What they fail to add is that even if they knew who the investors were, those investors would not care about the borrower’s sob stories anyway.

Digging deep to refi

Refinancing is so important to some underwater homeowners that they’re willing to dig into their pockets to make it happen.

That was the case with a Half Moon Bay couple who asked not to be identified for financial privacy. They bought their seaside home in 2005 for slightly more than $1 million with a seven-year adjustable-rate mortgage. Late last year, when they went to refinance, the home appraised at $730,000 – and they still owed $834,000.

So they took $140,000 out of their retirement and savings to pay down the mortgage enough to refinance into a 30-year fixed at 4.25 percent.

I question whether draining one’s retirement savings to pay down a mortgage is a good idea. The tax implications make that money very expensive.

“We felt we were up against the wall,” the woman said. Refinancing “would bring our interest rate down and save a lot of money over the life of the loan. It was a hard decision but we made the financial calculation that it was worth it.”

Most people don’t have the resources to explore that option, however.

What? I thought all jumbo loan borrowers were rich?

Fall through cracks

Every time a new program is announced, “we fall through the cracks,” she said. “We’re financially able to keep our house, but we cannot get the advantages other people have that fall into the right categories, or who defaulted.”

That’s the point of the false-hope bailout programs. The only real aid goes to the banks, and borrowers are left only with false hope to get them to make a few more payments. The next couple are testament to how successful these false-hope bailout programs really are. This family likely would have defaulted long ago if not for false hope.

Pieralde and Tierney have had the same experience of falling through the cracks.

They’ve applied for a loan modification, tried for the Federal Housing Administration refinance programs and looked into a “short” refinance with their bank. For a while they pinned their hopes on the national “robosigning” settlement, which calls for the five largest U.S. banks to offer principal reductions and underwater refis. But their servicer, JPMorgan Chase, does not own their loan, which makes them ineligible for the refi.

“We’ve worked hard all our lives,” Pieralde said. “We’re watching other people get help. This settlement was something we were hoping (would help). Now we’re stopped dead again.”

And they will continue to be stopped dead over and over again. They are the ones paying for the bailouts of the irresponsible borrowers through their continued high interest rate payments. Suckers.

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