This month I wanted to write about the problem with Jumbo mortgages. For those of you who don’t know, these are all loans with loan amounts in excess of $417,000 (currently). I have had a lot of calls lately from Jumbo loan holders who were hoping to benefit from all the recent Fed rate cuts. They have adjustable rates coming up for adjustment, or would like to otherwise refinance to a better rate. Unfortunately if you are trying to lock in a 30 year fixed rate Jumbo loan, you are running into rates anywhere from 7.5% to 10% depending on the mortgage company you call. After the initial shock and disappointment, the next thing everyone wants to know is “WHY?”

            Jumbo mortgages are sometimes called “non-agency” loans because there is no large conduit like Fannie Mae that securitizes and/or guarantees these loans. In fact Fannie Mae and Freddie Mac are the agencies that set the loan limit each year, above which they will not pruchase. However, that doesn’t mean that Jumbo loans are not securitized or converted into mortgage backed securities. They are. Those securities are called “collateralized debt obligations” or CDOs, and that is where the problem started.

You see… many of the same mortgage companies that provide Jumbo loans, also provided sub-prime loans in the past. Like Jumbo loans, sub-prime loans did not fit into any of the agency’s guidelines. So these mortgage companies packaged the Jumbo loans and sub-prime loans together, into these CDOs, and here is where it all gets really shady. The bond rating companies somehow gave AAA ratings to all these CDOs, with the sub-prime loans mixed right in. So you are now asking yourself, “How did sub-prime loans get securitized and rated so high, when everyone knew they were “junk” bond quality at best?” Well that is the same question that every investor who bought AAA rated CDOs is surely asking themselves as I write. These same investors still have lots of money to invest and would still be buyers of CDOs, if the ratings could be trusted. In other words, if the bond rating companies had done their job and separated the CDOs into different bundles of either junk or AAA debt, we would not be having any of these issues right now. In fact, sub-prime lending would likely still be available and in tact as a viable segment of the mortgage industry today. There is a market for junk bonds after all, and the rate sub-prime borrowers would be getting, could be accurately reflective of their “junk” status. Meanwhile Jumbo money for AAA borrowers would be down around 6% and flourishing too.

So here is my idea. Pick up a phone, a pen or open your email and make contact with your representatives in Congress. Tell them you are sick and tired of them spending all this time on baseball players and NFL coaches with video cameras. Tell them instead to start dragging these bond rating companies before their committees, and asking them the same simple question (above). Because the problem we have is one of liquidity, which is based upon a complete lack of trust in our rating companies. Jumbo rates are NOT going to get better, until these end investors regain confidence in that system. And that isn’t going to happen until we have some real house cleaning at those rating companies specifically.

For expert advice on any aspect of home or business finance, call the professional. Dan Smith can be reached at 303-674-0201 or visit him on the web at www.ColoradoHomeLoans.com