A Plan to Transfer Losses on Jumbo Toxic Mortgages to Taxpayers (repost)

Due technical difficulties with our threaded comments, we closed the comments on the original post. The entire post is now here, and comments are open.

Do you want to pay the losses from jumbo loans — big loans to rich people — with your taxes?

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price …… $767,000

We be fallin up (up)

Never fallin down (down)

We keep it at a higher level elevating now,

(put it in your) in your area,

(city or your) town,

Black Eyed Peas — Fallin' Up

In our modern mortgage era, nearly all loans are backed by the US government. At one time we had something resembling a free market, but the quasi-governmental entities Freddie Mac and Fannie Mae crowded out much of the mortgage market, and when they were taken over by the Treasury department, they basically took over the mortgage market together with the FHA.

The GSEs and the FHA were originally intended to provide mortgages to lower and middle income Americans who where not being served by the free market. Rich people can get loans because they have assets and often high incomes.

There hasn't been much need to subsidize rich people, and there isn't much support among the electorate for such subsidies. That is why we have a conforming limit to GSE and FHA loans. Raising this conforming limit would offer a government subsidy to wealthy or high-income borrowers. It would also give opportunity for lenders to refinance many of their toxic jumbo loans into government-backed toxic loans and shift losses to the US taxpayer.

Total Mortgage founder: Increase jumbo loan limit nationwide to spur the market

by CHRISTINE RICCIARDI — Thursday, October 28th, 2010

John Walsh is founder and president of Total Mortgage Services, a direct mortgage lender and broker based in Milford, Conn. For this edition of In This Corner, Walsh gives his take on the jumbo loan market and the limit restrictions imposed across the country.

HousingWire recently spoke with an analyst who said jumbo loans are now performing similarly to the subprime market during the housing bubble. The delinquency rate for this type of mortgage is becoming abnormally high. How does this compare to your experience in the marketplace?

There's been a large loss in value in the jumbo market that has to do with a number of factors: the loss of liquidity on the jumbo side and the fact that there are fewer jumbo outlets has put further pressure on the jumbo housing market. I think that's the reason why there are troubles in that sector.

Let's put the horse back in front of the cart. The reason there is less liquidity and fewer jumbo outlets is because 10% of the borrowers are delinquent, and there is no government agency stepping up to take these losses. The lack of liquidity is the symptom of the market's real trouble: delinquent borrowers.

As far as a percentage decline in value, the jumbo market seems to have been hit extremely hard which has contributed to the performance on those loans — a lot of those jumbo loans are underwater.

That being said, prices have gotten to somewhere near a low.

What tea leaves did he read to come to that conclusion?

With the mortgages that we're giving out today, the loan-to-value requirements are a lot steeper, the credit score requirements are a lot steeper, the debt-to-income requirements are a lot more stringent. So I think the jumbo loans being written today as opposed to the ones written even as little as six months ago or a year ago, are going to perform significantly better. That's why you're beginning to see an ease on the jumbo side of loans.

The tightening of requirements he is talking about has also reduced the number of borrowers in the jumbo loan pool considerably. Think about how many homes are priced over $1,000,000 in Orange County, and pair that with the number of borrowers who can actually qualify for and make the payments on a jumbo loan — not factoring in mortgage equity withdrawal to make Ponzi payments. The supply of these homes greatly exceeds the potential demand.

There's also a lot of legacy jumbo problems which I think is just a function of the value of homes.

The legacy problems are a function fo the value of homes? I thought the problems were because lenders were insanely stupid and gave out huge loans to anyone with a pulse. And in fact, it was giving out those stupid loans with inflated the housing bubble and a created the problem with home values we have today.

There was a lot of no income (documentation) loans that were done on jumbo borrowers — that seemed to be the way a lot of the jumbo loans were done. A lot of places did no income option ARMs. So a lot of those problems, that's what you're seeing now from a legacy side of things.

Legacy loans: a feel-good euphemism for everything stupid in the housing bubble. The word legacy almost makes it sound regal, just, and important, like something meant for the aristocracy. I say we let the aristocracy eat the legacy loan cake they baked.

Going forward, the loans that are being written today are significantly better credit risks. That's why you're beginning to see some liquidity in the jumbo market.

As far as the demand for jumbo loans, where do you see most of the demand coming from? What kind of loans are these?

We don't really do commercial lending, so it's all residential lending on the jumbo side. The jumbo side is not really regional, there's just more people calling about them these days. I would say demand is up at least 25% over the past couple of months. We're beginning to refinance some of our customers from two, three, four years ago that got really good jumbo mortgage rates, but because the rates have come down so much, they're beginning to come into that area where a refinance makes sense. We have seen a fairly significant uptick in the jumbo refinances recently.

Phone calls asking about jumbo loans is not demand. I can imagine the calls he must be getting…

Qualified borrowers is real demand, and that kind of jumbo loan demand is not increasing with near 10% unemployment.

You mentioned in a statement that you believe conforming loan limits should be raised across the country, not just in "high-cost areas." What do you mean high-cost areas? How would this change affect the market?

There's a conforming jumbo now, so in certain areas of the country you can go and get virtually the same prices as a conforming loan and get the loan to go to either Fannie Mae or Freddie Mac. Normally the conforming loan limit is $417,000, but in certain areas you can go up to $729,750 as a mortgage amount. That's only in 20 metropolitan areas. So even though you're in one town, where you may only be able to go up to $650,000, in another town the limit is $729,000. So it varies from ZIP code to ZIP code. My thought is you should expand that increased conforming loan limit countrywide because a lot of people fall between $417,000 and $729,750.

Do the taxpayers want to subsidize loans between $417,000 and $729,750 everywhere? I think it is a ripoff for the taxpayer that those loans are insured here, but to do that everywhere would simply expose the taxpayer to more risk.

It would put a lot more people in the purchase market that wouldn't necessarily qualify under the jumbo program, but may qualify under this particular program. You also bring FHA into the possibility, which is 3.5% down up to $729,750. I think it would expand a ton of potential, not only buyers and a lot more purchases in the range $417,00 to $729,750, but also allow a lot of people to refinance and take advantage of these unbelievably, historically low rates.

We may be able to re-inflate the housing bubble nationally if we allowed 3.5% down loans up to $729,750. I don't think that would be a good thing, particularly since the taxpayer would be absorbing all the losses when the echo bubble burst.

A lot of people just don't qualify based on their loan-to-value; a lot of people have lost so much equity they can't capitalize on these low rates. And if all these people have the ability to refinance, you're looking at a lot of people saving money, a lot more money being pumped into the economy from a refinancing perspective. From a purchasing perspective, obviously when people buy a home they hire more contractors and go to Home Depot more. The good things that happen when people buy houses will happen and spur the purchase market even more all across the country; not in just these defined areas.

I am always amazed that people think you can borrow your way out of debt. Excessive debt is the problem. Adding to that debt is not a viable solution, and neither is refinancing excessive debt at a lower interest rate.

I think that could be a great thing on top of all the things the government is trying to do.

I think it is a terrible thing to do just as the other failed things the government is trying to do.

It's not like the short sale refinance program where they're actually going to subsidize the write down or the mortgages. This is just you're taking on a larger loan size.

Great idea: take on more debt because you can't afford the debt you already have. Brilliant!

I think it's a great time because the underwriting standards have gotten so much more stringent these days you're getting a lot more qualified borrowers.

Why hasn't the government already put in place some policy to deal with jumbo loans?

I'm sure there's a rationale as to why they only did it in pocket areas. I think they did it upon median income in particular areas. I sort of understand why they did it, but my philosophy in that area is this: just because you live in Fairfield, Conn., you have the ability to take advantage of this program. But if you live in Omaha, Neb., and you have a loan amount that meets the value of the home and you still have to meet the same underwriting guidelines, why can't you, in Nebraska, take advantage of that particular program? Again to spur more purchase activity and also to take advantage of lower rates for the ability to refinance and put more money back into the economy.

This idea is dumb for many reasons, but as the jumbo loans losses continue to mount, expect to see this dumb idea resurface. Personally, I don't want to become liable for the extravagant borrowing of fools with huge losses on their jumbo loans. As you read about today's featured borrower, ask yourself if you want to pay his bill.

Buy, refi, and bye-bye

Most of the foreclosure properties I see today have this familiar pattern: fools overpays during the bubble, and as prices go up, they add to their bloated mortgages until finally they implode and lose their property. Many of these people borrow enough to recoup their down payment and get some extra money out of the bank, and some do not. The owner of today's featured property had access to his entire down payment, but unless he used the HELOC, he may have left the down payment in the bank.

  • This property was purchased for $720,000 on 7/16/2004. The owner used a $575,200 first mortgage, and a $144,800 down payment.
  • On 8/8/2005 he refinanced for $584,600 and recovered some of his down payment.
  • On 10/14/2005 he opened a $180,000 HELOC.
  • He quit paying in late 2008, and he squatted for about 21 months before the auction.

Foreclosure Record

Recording Date: 07/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/11/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 02/05/2009

Document Type: Notice of Default

The flipper that purchased the property at auction is playing games with the listing price. This is the slow grinding loss of imaginary equity.

Date Event Price
Nov 04, 2010 Price Changed $767,000
Oct 23, 2010 Price Changed $772,000
Oct 15, 2010 Price Changed $775,000
Oct 01, 2010 Price Changed $779,000
Sep 23, 2010 Price Changed $785,000
Sep 17, 2010 Price Changed $789,000
Sep 01, 2010 Listed $795,000

Irvine Home Address … 7 PEPPERCORN Irvine, CA 92603

Resale Home Price … $767,000

Home Purchase Price … $661,500

Home Purchase Date …. 8/23/2010

Net Gain (Loss) ………. $59,480

Percent Change ………. 9.0%

Annual Appreciation … 60.7%

Cost of Ownership


$767,000 ………. Asking Price

$153,400 ………. 20% Down Conventional

4.21% …………… Mortgage Interest Rate

$613,600 ………. 30-Year Mortgage

$144,845 ………. Income Requirement

$3,004 ………. Monthly Mortgage Payment

$665 ………. Property Tax

$225 ………. Special Taxes and Levies (Mello Roos)

$128 ………. Homeowners Insurance

$222 ………. Homeowners Association Fees


$4,244 ………. Monthly Cash Outlays

-$704 ………. Tax Savings (% of Interest and Property Tax)

-$851 ………. Equity Hidden in Payment

$231 ………. Lost Income to Down Payment (net of taxes)

$96 ………. Maintenance and Replacement Reserves


$3,015 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$7,670 ………. Furnishing and Move In @1%

$7,670 ………. Closing Costs @1%

$6,136 ………… Interest Points @1% of Loan

$153,400 ………. Down Payment


$174,876 ………. Total Cash Costs

$46,200 ………… Emergency Cash Reserves


$221,076 ………. Total Savings Needed

Property Details for 7 PEPPERCORN Irvine, CA 92603


Beds: 3

Baths: 2 full 1 part baths

Home size: 2,046 sq ft

($375 / sq ft)

Lot Size: n/a

Year Built: 2004

Days on Market: 66

Listing Updated: 40486

MLS Number: P750630

Property Type: Condominium, Residential

Community: Quail Hill

Tract: Laur


A True Turnkey Property with An Incredibly Open And Spacious Floor Plan Boasting High Ceilings, Plantation Shutters, Hardwood Flooring, New Paint, and Stainless Steel Appliances!!! Along with the Bedrooms there is any Extra DEN downstairs & LIVING AREA upstairs!!! Customized Tiles and Kitchen with Granite Countertops and Stainless Steel Appliances with a Brand New Wine Cooler! Boasts a TRUE Master Bedroom Features Walk-In Closet, Private Balcony, Dual Sinks, Roman Tub & Separate Shower. Inside Separate Laundry Rooom And Plenty Of Storage. This Fantastic End Unit Share Only 1 Wall. Situated In A Quiet Location Of A Very Desireable Complex Located In The Heart Of Irvine. Close to Restaurants, Theater And Shopping. Close To The Toll Road And It Is One Of Irvine's Newest complexes.

Why is this in Title Case?

Do you feel the excitement with the exclamation points!!!

29 thoughts on “A Plan to Transfer Losses on Jumbo Toxic Mortgages to Taxpayers (repost)

  1. tenmagnet

    PR is right
    Unfortunately, no one else is willing to acknowledge it.
    Demand in Irvine remains strong
    TIC can’t roll out new supply fast enough.
    Down payment numbers are in most cases much higher than 20% with no sign of slowing down.

    1. bigmoneysalsa

      “Prices are too high compared to rents, and that state of affairs cannot continue indefinitely.”

      5 years ago, on that observation alone, I and many others concluded that there was a housing bubble. And on that observation alone I conclude that the bubble isn’t done playing out in Irvine (and several other areas). It really is as simple as that.

      1. Planet Reality

        The only thing we know for sure is that 5 years ago you were 5 years younger and had 5 more years to live.

          1. Planet Reality

            There’s always a bright side.

            It was less mind numbing than a day driving around barren Las Vegas neighborhoods.

  2. HydroCabron

    Stock and commodity bubbles can crash in a few days, and, in the process purge the Kool Aid from the systems of even the published cheerleaders of those bubbles.

    Real estate? The illiquidity of real estate, together with the unusual number of government props to this asset class, mean that declines can take longer than the 6-18 month memory capacity of the average participant. Most citizens do not remember much beyond a year ago. Hence there is widespread belief that Obama signed the first TARP bill, and that responsible homeowners are losing their homes en masse, as if the era of overborrowing never occurred.

    So we may not get a truly brutal “Aha: Real estate can crash!” scenario. This will facilitate the behavior of total punks like Walsh, who will continue to spout Colin-Powell-magnitude lies that the bottom is here and it’s just a matter of liquidity getting to the right places.

    As each leg down in the market spans a period longer than people can comfortably hold in their minds, the river of bullshit will, through sheer pressure, hold back the necessary vomiting up of all the previously ingested Kool Aid. The liars will escape their well-deserved ridicule and disgrace.

    It’s difficult for most people to point to a mirror and say “I just paid a half million for a tract house in Irvine: I am an idiot.” Spreading the collapse over many years will allow the denial to persist.

    The delusions have not yet left the population. We are a decade from the bottom.

    1. Perspective

      “It’s difficult for most people to point to a mirror and say ‘I just paid a half million for a tract house in Irvine: I am an idiot.’”

      Is it similarly difficult to look in the mirror and say, “I’m paying $3K monthly in Irvine rent for a townhouse just so that I can have a garage with nice amenities. That’s $144K over the past four years. I am an idiot!”?

      1. IrvineRenter

        I preferred to pay $144K in rent rather than paying $300K in payments for the same property.

        1. Planet Reality

          I’m not sure what his point was, but here is what I took away from it:

          You were willing to pay close to $200,000 in pre tax dollars to live in Irvine for 3 years. Damn, there must be something freaking special about Irvine. You could own a nicer riverside house for that much.

          1. Perspective

            Yes, my point is Irvine rents are inflated, relative to other nearby areas. We looked at Irvine Co. townhomes with attached garages in 2006-2007, and they ran from $2,500-$3,000.

            If you rent here, you’re choosing to spend more. Is that stupid? Maybe.

            If you buy here, you’re choosing to pay an inflated price. Is that stupid? Maybe.

            I’ll have to do the math 10 years from now, to tell you “how stupid” our purchase appears to have been.

            However, renters, IrvineRenter included, will also need to do the math years from now to know “how stupid” their decision to continue renting was.

            It’s all relative. The same can be said for cars. Is it “stupid” to pay $50K+ for a BMW? Maybe…

          2. Planet Reality

            In 10 years time some one who rents a single family home in one of the Nicer parts of Irvine will have unloaded a mint in pre tax dollars to live in Irvine.

            You are looking at close to $750,000 in pre tax dollars. But don’t try to tell that person that Irvine is special. It’s a bland suburb.

          3. IrvineRenter

            Perspective, I don’t think you are stupid. You bought a house you can afford in a nice neighborhood, and you can wait out the market. If all the bullish sentiment is correct, you may come out far ahead. There are many variables in the future.

            I don’t think either of us regrets the opposite decisions we made. Your circumstances are different because as a high wager earner, you could afford a house, albeit perhaps smaller than others of your wage group (I am guessing, I don’t know). At my income level at the time, I was either going to rent a nice 3/2 or buy a 1/1 and try to fit a family into it. I only would have considered 30-year fixed rate mortgages, so affordability was very low. I couldn’t do the 1/1 (my family entitlements) so we chose to rent.

            If I could have afforded to buy a house as nice as the one you bought with my income, I may have done it. A change in resale value is only a problem if you have to sell to move.

          4. Perspective

            Planet Reality – I think you mean to use “after tax” dollars rather than “pre tax.” I’d love to pay rent “pre-tax”!

            IR – Oh, I have regrets. I would be much more comfortable and happy “wasting” money on inflated Irvine rent right now, but my wife just wasn’t interested in that.

            We’ve been fortunate in this recession. I could complain that we’re underwater 15% today, but the actual dollar amount is less than 30% of our household income. So we just keep making our fixed fully-amortized payment while I agonize over the housing downturn daily and my wife completely ignores it…

          5. Planet Reality

            No I mean pre tax. If you are paying $3000 a month in rent you are paying at least $4000 a month of your salary towards rent. That’s at least $48,000 of your salary a year.

          6. IrvineRenter

            That relative state of calm and peace of mind is your reward during the recession for prudently taking on debt. You stayed within the guidelines, and because of it your emotional state is much more serene than others who bought when you did but did not remain conservative in their borrowing.

          7. Perspective

            Hmm, I’ve always heard this argument made with the term “after tax” dollars – as in, “That’s three thousand after tax dollars you’re paying toward rent. It takes you $4,000 in gross (“pre-tax”) earnings to make that rent payment.”

          8. Chris

            You can get a Bimmer for less than $40k. Who says you have to get a 5 series or above.

            That being said. Toyotas aren’t exactly cheap either.

        2. Perspective

          Agreed. In the current state of Irvine, and its projected path, it’s preferable to have paid $144K in rent, than twice as much in fully-amortized mortgage payments much more than $144K.

          But is it stupid to pay $144K in rent when $100K could’ve gotten you a similar place in a nearby less desirable area?

  3. Stock Investor

    HydroCabron: “Stock and commodity bubbles can crash in a few days …”

    If everything is falling apart, then real-estate is not a problem. You may want to buy gun and ammo.

  4. Naive

    I am expecting a significant economic downturn next year. The stimulus packages are going to expire and the new congress is not going to pass another one. In addition, we may actually have a tax increase if the Bush tax cuts are allowed to expire.

    Irvine real estate is not immune to these factors. As prices drop in surrounding neighborhoods, demand will shift, weakening the demand here. In the last 60 days new listings have been almost double the number 3+ BR properties that sold over the same period.

    1. Naive

      Meant to say “In the last 60 days new listings of 3+ BR properties have been almost double the number that sold over the same period.”

    2. Iphb

      Not only that…it seems that in 2010 buyer focus in Irvine has mainly been mainly on the brand new developments. As areas like Woodbury, Woodbury East, and Stonegate East are built out, buy focus shifts to new developments and further away from existing neighborhoods.

    3. Chris

      If y’all check the current Craigslist listing for Irvine 3 bed homes for rent, you’ll see several that goes for under $2k nowadays.

      It used to be that you cannot even find one for under $2k a few years ago.

    4. Tony

      Congress has nothing to do with it. It’s the Central Bank that may continue to pump money as it sees fit. The new congress might be just as happy as the exissting congress when the Fed does it again.

    5. Tony

      I hope you’re right. But: Congress has nothing to do with it. It’s the Central Bank that may continue to pump money as it sees fit. The new congress might be just as happy as the exissting congress when the Fed does it again

    6. irvine_home_owner


      Allow me to play the contrarian role:

      Irvine real estate is not immune to these factors. As prices drop in surrounding neighborhoods, demand will shift, weakening the demand here. In the last 60 days new listings have been almost double the number 3+ BR properties that sold over the same period.

      Maybe not totally immune… but quite a bit more immune than surrounding cities.

      Regardless of how many listings there are, that is still less than other areas and at higher prices. I can find newer 3-car garage SFRs in Mission Viejo for less than $650k… this *condo* is $750k+. Newer 3CWG homes in Irvine are at $900k or more.

      Price drops in surrounding areas can have an opposite effect on demand. You can tweak the “flight to quality” theory and see that people would rather buy in Irvine because prices are NOT dropping as fast… so demand actually stays the same or rises.

      Aliso Viejo and Laguna Niguel both have new home communities that have been selling for *years* and are still not sold out… Woodbury sold out multiple tracts, over 700 homes in less than a year.

      That’s not a theory… that’s a fact. It’s going to take a long time for Irvine prices to get down to 1999 levels (as often predicted here)… and by then, the market may have bounced back… just like in the early 90s, and Irvine prices tend to rise much faster than they fall.

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