The Shocking Reason the Real Estate Market Might Be Headed for a Crash

For the past few months, the housing market has been filled with uncertainty. People feared the financial downturn would lead to a crash, but real estate prices remained reassuringly high for several months. This good news might be about to come to an end. The reason some experts are predicting a crash? It turns out the same culprit behind the 2008 recession might be rearing its head again.

Jumbo Mortgages Have Been on the Rise

A little known, but very important type of mortgage is a jumbo mortgage. This is a type of loan that is so big it cannot be guaranteed by Fannie Mae, Freddie Mac, and the FHA. Typically used to purchase massive luxury homes, jumbo mortgages tend to have lower interest rates and underwriting standards because lenders assume high-income borrowers are reliable lenders. These loans were partially responsible for the 2008 crash. Between 2004 to 2007, the amount of money held in jumbo mortgages soared to over $3 trillion. When the housing market dropped, many of these pricey homes lost their value. Banks realized the danger of jumbo mortgages, and for several years, many banks quit giving these loans out. In 2016, when all sorts of lending restrictions were eased, the amount of jumbo loans soared. During the past three years, $1.5 trillion worth of jumbo mortgages have been created.

Wealthier Homeowners Are Struggling

Many people thought the housing market would escape the COVID-19 downturn because the majority of people without jobs are hourly hospitality workers who rent, not white collar homeowners. This might be true, but things get a little more concerning when you look at the type of person who owns a jumbo mortgage. Many people in the wealthier demographic had their funds secured in investments, so the financial crash has wiped out their savings. They are often small business owners, so their assets have declined sharply. Furthermore, many highly paid contract workers and freelance workers, such as musicians and software entrepreneurs, have been struggling to find funding since the virus hit. By June, the number of jumbo mortgages in forbearance has doubled, and the situation continues to worsen.

A Wave of Jumbo Mortgage Defaults May Be Coming

With many jumbo mortgage owners struggling to make ends meet, many of these mortgages are at risk. The average residential home is still selling well, but there has been a huge decline in demand for the types of luxury homes secured by a jumbo mortgage. This means that a jumbo mortgage owner who is running out of money might not be able to offload their property on someone else. If this happens, their only option is to quit paying their mortgage. For the past few months, there has been a forbearance on mortgage payments. People who could not pay their mortgage could continue living in their home without foreclosure. As things stand now, all of these foreclosure stays will be over by August. If there is no extension, the nation is facing a wave of foreclosures. With the extra-high price tags of jumbo loans, this could lead to billions and billions of dollars in defaults.

Jumbo Mortgage Defaults Could Have Disastrous Effects

Trying to foreclose on a jumbo loan poses all sorts of challenges for a bank. Placing a bunch of extra pricey homes on the market at the same time can easily flood the market and drive housing prices down. Therefore, many banks have developed a policy of refinancing jumbo loans instead of foreclosing them. However, over 75 percent of re-modified mortgages still result in a default within the next two years. This has been going on for a while, so there are currently billions of dollars worth of delinquent jumbo mortgages being held by banks. Many financial experts have been calling the jumbo mortgage market "a ticking time bomb" for years now, and the COVID-19 pandemic might be the thing that makes it explode. With more jumbo mortgage defaults than ever, banks may be forced to finally foreclose after the mortgage deferment period ends. This may potentially have far-reaching effects, driving prices down as consumers now have access to a wide variety of cheaper luxury homes.

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