Real Estate

Rate jump for big mortgages

The cost of financing an expensive home purchase is jumping, making high-end buyers the latest victims of the mortgage meltdown.

By Les Christie, staff writer

NEW YORK ( -- Don't look now but the cost of financing a home purchase in some of the nation's priciest areas just got more expensive.

Wells Fargo, one of the nation's biggest mortgage lenders, raised the interest rates on its 30-year, fixed-rate, non-conforming (AKA jumbo) loan to 8 percent last week, up from 6.875 percent for loans made through mortgage brokers. Wednesday, they stood at 7.875 percent. (See correction below) Other lenders followed suit and more are likely to join them.

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The rate jump means the monthly bill for a $600,000 mortgage would hit $4,403, compared to $3,942 previously, an increase of $461.

Jumbos are loans of more than $417,000, the limit observed by Freddie Mac and Fannie Mae, the government sponsored enterprises (GSEs) that buy loans in the secondary markets. Freddie and Fannie don't buy loans above that cap.

Wells Fargo's timing may seem odd: 30-year, fixed-rate mortgages have come off their highs for the year; their benchmark 10-year treasury has fallen considerably in the past few weeks to 4.69 percent from 5.2 percent, with further drops expected. And the Federal Reserve, which meets on Tuesday, has shown no inclination to raise its key rate.

Even borrowers with shakier credit scores than many jumbo loan applicants can qualify for a prime loan at about 6.75 percent, only 0.25 or 0.30 percent above what more qualified borrowers get, according to Keith Gumbinger, of HSH Associates, a mortgage information publisher.

But jumbo borrowers are paying a point and a half more than those who receive a conforming loan. That's way up from the traditional premium spread of about a half to three/quarters of a point.

Why should jumbos, whose borrowers often boast high incomes and assets, cost more than conforming loans? It's because Wall Street has stopped buying the loans.

Conforming mortgages, or loans below $417,000, carry much lower risk, because Freddie Mac and Fannie Mae guarantee a market for them. In a tighter credit market, lenders are charging more for jumbos because of the extra risk of not being able to sell them to the investment community.

Allen Hardester, a mortgage broker in Maryland, said that jumbos have lost their appeal for investors. "[Lenders] are having trouble unloading even prime, fully documented, 20 percent down jumbos. Nobody has any faith in real estate," he said.

George Hanzimanolis, president of the National Association of Mortgage Brokers, said, "Wall Street is just so shaky right now that any kind of mortgage-backed anything is a concern."

The implications for high-priced markets may be serious. On a wider scale, jumbos account for 16 percent of the overall mortgage market, according to Inside Mortgage Finance, which provides news and stats to the mortgage industry.

On an individual level, it can push potential buyers out of a market, because they generally care less about a property's price than their final monthly mortgage costs.

A buyer with a budget of $4,000 a month may be able to afford a $600,000 mortgage at 6.875 percent, but with jumbos up to 8 percent, a buyer with the same budget can only afford a $545,000 mortgage. To make up for the increased interest rate, a home seller would have to knock off nearly 10 percent from a selling price.

In many places, rate hikes for jumbo loans matter little, because most house prices fall well below the limits set by the GSEs. The median house price in the United States still stands at about $220,000.

Factoring in a 20 percent down payment, a home would have to cost more than $521,250 to trigger the higher interest rates of a jumbo loan.

But in some housing markets, such as most of California, much higher home prices prevail, pushing the majority of purchases into jumbo territory, according to mortgage broker Steve Habetz of Threshold Finance in Connecticut.

Buyers have to pay an extra premium, above already outsized home prices, to get a mortgage in the Bay Area, Silicon Valley, Los Angeles and many other California areas. The same holds true for the New York region, Boston, Washington D.C., parts of Florida and other high-priced markets.

"There are hot spots like that all over the country," Habetz said, "where there's a potential for a real meltdown."

The drying up of investment capital for jumbos is part ofa widespread liquidity squeeze. According to Gumbinger, a lot of the secondary market -the investors who buy securitized loans from lenders - has put itself on hold.

"They're saying, 'I'm not going to buy any more paper until I know what I have to know,'" he said.

As far as non-conforming loans are concerned, "We are seeing essentially a frozen market," said Jay Brinkman, the Mortgage Bankers Association vice president for research and economics. "When lenders can't get a bid even on the AAA loans, it's a market that has ceased to function."

A whole class of borrowers, subprime home buyers, has already been virtually eliminated from the home-buying universe. If jumbo buyers also face much higher interest rates, many will postpone home buying plans. And that can only add to the pain of slumping or stagnant markets.

Correction: An earlier version of this story did not make a distinction between loans made through mortgage brokers and ones offered directly by Wells Fargo, which, as of Wednesday, carried a rate of 7 percent.  Top of page

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