Origination News Feature Story

Eyeing Ways to Bring Jumbo Liquidity Back

By Bonnie Sinnock

STAMFORD, CT-There are a few ways the government could restore jumbo liquidity, according to David Adamo, chief executive officer of Luxury Mortgage here.

As to why the government should, Mr. Adamo points to the "huge amount of economic impact" jumbo borrowers could potentially have in terms of ancillary home purchase spending on things like appliances and contractors. He said NAR data based on median prices in the purchase market and a per home economic impact of $67,811 in 2007, show there was a total of $263 billion in economic contribution from home purchase spending that year. Of that total, $46 billion came from conforming jumbo loans and $32 billion came from superjumbo loans. An upward revision by his firm that takes into account the likelihood of higher expenditures for more expensive properties may be even more exact, he said. This is based on average prices in the top 100 most expensive ZIP codes and economic contributions of $82,284 for conforming, $196,921 for conforming jumbo and $466,824 for superjumbo. It shows the total economic contribution may be closer to $383 billion, with $61 billion coming from conforming jumbo and $36 billion from superjumbo.

Among the things the government could do would be to apply the agency jumbo loan limit of $729,000 across the board instead of on a county-by-county basis, as is the case currently, Mr. Adamo said. This would be justified because real estate values vary widely on a more local basis than even county level. Florida's Palm Beach County, for example, has a $423,750 limit, but in the town of Palm Beach itself the average purchase price in 2008 was over $2 million, Mr. Adamo said. (His lender/broker business, which closes about 70% of its loans in its own name, does business in both the conforming and jumbo sector and lends in about 20 states that have higher concentrations of jumbo and superjumbo loans. Among these are California, Florida, New York, New Jersey, Connecticut, Massachusetts, Texas, Illinois, Washington and other luxury home markets.)

Mr. Adamo also suggested that the Federal Reserve could buy jumbo mortgage-backed securities through a purchase program similar to the one it used to buy conforming and government MBS.

In addition, he suggests giving private equity firms more ability to participate and invest in the banking sector by loosening restrictions in this area might bring more capital back to jumbos.

Also a potential way to restore jumbo financing could be more use of covered bond programs in the United States by the banks. These offer what investors may perceive as an attractive combination of relatively strong credit, high yields and offer more "skin in the game," given they are kept on issuers' balance sheets as opposed to securitizations, he said. Securitizations only funded about 2% of jumbo originations in 2008 and while participants in that market are working on reforms to bring investors back Mr. Adamo thinks covered bonds might bring investors back faster.