The Daily 2¢ - Jumbo Mortgage Avalanche

The times they are a changin’… and FAST TOO!

One week the Bulls are celebrating the “Goldilocks Economy” and DOW 14000 the next, a worried crisis-laden Larry Kudlow is stammering kookily about some crazy idea that the Federal Reserve should be buying up all the subprime and jumbo mortgages in order to prevent financial collapse… and in front of Robert Shiller no less!

Among the tumult surrounding Countrywide Financial and other mortgage lenders, yesterday’s business media was peppered with a slightly new and possibly more significant source of trouble for the nation’s housing markets, particularly for the hyper-inflated ultra-bubbly metro areas.

The availability of “Jumbo” mortgages, i.e. mortgages that exceeded the current OFHEO limit for Freddie Mac and Fannie Mae conforming loan status (currently $417,000 for a single family home), have essentially ground to a halt.

I say essentially because you can still get a Jumbo loan provided you give full documentation of your income (tax returns, pay stubs etc.), put down 20% on the purchase and are willing and able to finance the remaining principle at an over 7% interest rate.

Use Bankrate.com now and see for yourself… fixed rate, ARM, Interest Only… it doesn’t matter they are virtually all over 7% and almost non-existent if you’re not putting down 20%.

This is a kiss of death for the bubble-metro areas where home prices, even for the most modest starter homes, are still ridiculously inflated after having been pumped up by years of a loose lending induced buying mania.

The availability of cheap Jumbo’s is absolutely necessary for these areas to maintain any volume and fluidity of home sales, now they are gone and the first signs of the impact should be seen in the home sales statistics compiled during the next several months.

We have definitely reached another major turning point in the housing meltdown story as this will likely be the start of the most significant period of downward price adjustment in this cycle.

But wont things just snap back if the Fed cuts rates?

Not in my estimate.

To use an analogy, the mortgage meltdown is like an avalanche.

Friction exceeded its critical limit and the whole of the market has come crashing down the mountain.

Some lenders were instantly killed as pieces of debris crashed through their midsections; others are buried out of sight deep within the pile and, struggle as they might, will simply suffocate before they are able to resurface.

Still others are stuck in various ways but will go so far as to gnaw off arms and legs and stumble, bloody and hemorrhaging down to safety and a possible handicapped recovery.

A lucky few are simply trapped in shallow caves whereby, through a lot of digging, they will eventually free themselves, relatively unscathed but still bruised and shaken.

All the dead and survivors will share one thing in common though… none will be returning up the hill for some time to come.

P.S. I thought I might use another natural disaster analogy but with the earthquake in Lima Peru, a Tsunami threat in the Pacific, Hurricane Flossie hitting Hawaii, and tropical storms Erin in the Gulf and Dean in the Caribbean, I thought it might be in better taste to choose the avalanche!