When it comes to extravagant housing, traditional mortgage rules don’t apply
Paying for an average home is a difficult process – a large down payment can wipe out savings, the paperwork seems endless, and the mortgage often lasts for decades.
In the upper echelons of the Southland residential real estate market, financing isn’t much easier – it just involves more eager to please private bankers, vast cash reserves, and massive multi-million dollar loans.
Los Angeles is the fifth-largest wealth hub in the world, based on current and projected population of affluent residents, the value of real estate investments, and connectivity with other global hubs, according to the Wealth Report on most recent from the UK consultancy firm Knight. Franc. Only London, New York, Hong Kong and Shanghai rank better.
Prices in the city’s luxury residential market climbed 5.3% from 2015 to 2016, the largest increase in the United States behind Seattle’s 9.7% rise, according to the report.
Nationally, the median price of a luxury home at the end of July was $ 1.6 million, according to the Institute for Luxury Home Marketing. In Los Angeles, it’s almost $ 4.1 million.
Most of Southern California’s high-end buyers are locally based, although many are from overseas.
“The buyer of the over $ 10 million property is coming from everywhere,” said Stan Smith, managing director of Teles Properties, a luxury real estate brokerage based in Beverly Hills. “Aside from the occasional celebrities making headlines, most buyers are people you’ve never heard of.
In this market, cash is king. So far this year in Los Angeles County, excluding Beverly Hills and West Los Angeles, 35% of homes priced at $ 2 million or more have been bought with cash, data shows of the Multiple Listing Service provided by the California Assn. real estate agents.
But when wealthy buyers don’t have the cash to buy their homes, many turn to massive mortgages known as jumbo loans.
The average borrower usually uses a so-called compliant loan, which is guaranteed and capped by the government. For most of the country, the limit is $ 424,100, but in expensive Los Angeles County, the maximum is $ 636,150, according to the Federal Housing Finance Agency.
Jumbo loans exceed the mortgage amount that Fannie Mae and Freddie Mac will buy from lenders. Many experts accuse the financing tactic of having helped activate the real estate bubble by encouraging extravagant real estate purchases.
But in recent years, jumbo mortgage interest rates have exceeded expectations, said Lynn Fisher, vice president of research and economics for Mortgage Bankers Assn.
“Historically, compliant loans are more liquid and are backed by government agencies, so from a supply side they are easier to make loans,” she said. “But since the crisis, we have witnessed a phenomenon where jumbo rates are also low and sometimes lower than conformism.”
Lenders have loosened the tap for giant borrowers. The credit supply for jumbo loans jumped 2.7% in July from the previous month, against 0.3% for compliant loans, according to a credit availability index from the Fisher Group.
High net worth homebuyers are attractive to lenders because their substantial income and assets make them seem less exposed to the risk of default. And many banks offer loans to attract premium customers.
“There’s a lot of publicity, a lot of competition to provide these loans right now,” Fisher said.
Yet from inception to payment, the jumbo loan process can be frustrating, especially for borrowers whose wealth is spread across different types of income, investments, inheritance, and assets. Documentation is often extremely complicated.
“A lot of these borrowers can’t walk into a traditional bank and get a $ 5 million loan,” said Brandon Boyd, executive mortgage consultant for Encinitas lender, Drop Mortgage. “It’s hard for a bank lender to pull out and figure that income out. “
Boyd said his company was using a more specialized approach, given the financial factors that might escape a bank relying on an automated filtering system. In addition to common mortgage products, Drop also offers personalized jumbo loans of up to $ 15 million.
Many clients – including entrepreneurs, film producers and athletes – don’t focus on their day-to-day finances, resulting in less than stellar credit scores, Boyd said. Or they are willing to pay a premium to protect their privacy by making a sale through a limited liability company, which is prohibited for Freddie Mac and Fannie Mae mortgages.
Drop’s loans – most of which are between $ 800,000 and $ 2.5 million – comply with government regulations and have not yet resulted in default, Boyd said.
“It’s not an irresponsible lending at all – it’s an alternative space, but it’s not the subprime of the past, not by far,” he said.
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