Debt Free

Although the name “Jumbo Loan” sounds like something you'd use to buy a mansion, in fact jumbo loans denote a mortgage that's become all to common in many areas of the country these days. A jumbo loan is a mortgage that's for an amount greater than the amount of money than the amount available using a standard, conforming mortgage. It's basically set by the amount that the 2 federally founded loan purchasers, Fannie Mae (FNMA) and Freddy Mac (FHLMC) will buy in the secondary market. It adjusts to reflect the increase in real estate prices, and now sits at $417,000.

The problem for many people is that in quite a few major metro areas, $417,000 does not a mansion buy. Far from it. That's basically the amount you'll spend for a decent 3 bedroom, 2 bath within 20 miles of downtown. Bostontonians, Serattleites, SoCalers, San Franciscans, and DCers know exactly what I'm talking about. If you've managed to amass some equity in your existing home, you could easily need the use of a jumbo to get a home in the $600,000 - $750,000 range. Again, a home in this price range, while a definite step up from an entry level, or “starter” house, isn't anything remotely mansion like in many areas of the country, even taking into account the recent market corrections. That range house would be just a step up from your first home.

Not wanting to be left out of the party, jumbo's have been in the news lately, just like, it seems, every other mortgage related product. Jumbo loans have always been more expensive than other mortgage products, but now they're getting harder to come by as well. It's gotten to the point where some banks, such as IndyMac, have indicated they'll not be selling them on the secondary market, but keeping them in their in-house loan portfolios. That should say something to all the investors out there. Namely, that there are still attractive debt secured investments out there.

Not everybody is a foreclosure risk and it seems that many have gone a bit overboard in their risk assessment. Why the industry ever decided that stated income and no doc loans were a good idea is a question for those with sharper minds than mine. If ongoing problems in the mortgage industry spread and cause people outside the financial and real estate industries to begin losing jobs, it may actually cause more to unload their homes, and the market to sink further. Now, however, we're just experiencing a well deserved correction in the market caused by stupid loans given by the very mortgage industry that's now coughing up blood. Just what were the industry insiders thinking when they decided to revise lending standards so that anyone with a pulse, or a presence in cyberspace, was a great candidate for a mortgage? Were they looking so short term that they were unaware that money to repay these loans would have to come from somewhere?

Sure, you could follow the train of thought that homes were becoming so expensive that creative loans were necessary to actually afford one. However, if lenders weren't giving out so many creative mortgages, the buyer pool would have been smaller, and home prices wouldn't have gone quite so far into the stratosphere. Or, you may have noticed that that free and easy credit, coupled with historically low interest rates encouraged the pool of buyers to swell to the point where sellers were grabbing every dollar they could get their hands on. The problem is that in economics, like at your local bar, any time there is a really big party, and many people are getting intoxicated, on either cheap booze or money, fights will break out and people will be hung over in the morning. People act like the party will go on forever and no one will notice what they're doing.

Too many people were invited to this party and they all showed up. Now there's going to be a great opportunity for those that can be janitors, or serve those in the future that didn't throw up on the table last night. Just because money's cheap doesn't mean you don't have to be a little bit smart about who you give it to.