Wall Street Journal – Borrowers with good credit are paying higher rates

Ruth Simon
The Wall Street Journal
Aug. 16, 2007 09:13 AM 

Higher mortgage rates are beginning to put the squeeze on many borrowers with good credit who thought they were insulated from the subprime market’s woes. Rates for “jumbo” mortgages made to prime borrowers have jumped to 7.64 percent from a recent low of 6.87 percent in early July, according to HSH Associates, as problems with subprime mortgages ripple through the broader market. That’s increasing costs for many home buyers, and could put pressure on home prices in some of the nation’s most-expensive markets.

Jumbo mortgages are loans that exceed the $417,000 limit for those eligible for purchase and guarantee by mortgage institutions Fannie Mae and Freddie Mac.  Jumbo loans aren’t just for the ultrawealthy. In high-cost markets such as Los Angeles, New York and Washington, they are commonplace for many people looking to buy an ordinary home. Rates on these loans have jumped in response to nervousness on the part of investors who buy jumbo mortgages after they’ve been packaged into securities.In response, some buyers are retreating to the sidelines. Others are using creative strategies to lessen the impact of higher borrowing costs or are finding they can still get a reasonably good mortgage rate, provided they shop around. Some sellers, meanwhile, are cutting prices to make it easier for would-be buyers to qualify for a lower-cost loan.

The turmoil in the jumbo market is particularly notable because rates for smaller “conforming” loans – those eligible for purchase by Fannie Mae and Freddie Mac – had edged downward in recent weeks and now stand at 6.69 percent. As a result, the gap between the prices of jumbo and conforming mortgages has widened to 0.77 percentage point, according to HSH Associates. That’s up from a recent low of 0.17 percentage point and well above the 0.24-percentage-point average since 2000.Jumbo rates could hurt home sales Higher rates for jumbo loans could well hurt home sales because they translate into higher costs for borrowers. The monthly payment on a $500,000 30-year fixed-rate loan, for example, would jump by more than $340 to $3,802 if the loan carried an interest rate of 8 percent instead of 7 percent.It’s too early to tell just how great the impact will be, however. August is typically a slow month for home sales, and the pressures could be short-lived if the jumbo market’s troubles subside soon.

Yet there are already signs that the rate increase is rattling some would-be buyers and causing some sellers to rethink their strategies. Linda Baron, an agent with Prudential Fox & Roach, Realtors in the Philadelphia suburb of Blue Bell, Pa., says she has seen some of the more expensive homes in her area come off the market and prices for others drop in response to the recent uptick in jumbo rates.

It’s gotten “very quiet in the last two weeks,” she says. “I think buyers are regrouping.” A buyer for one of her properties wanted to walk away from a large deposit at the last minute after jumbo rates shot up, she says, but then realized his mortgage rate was locked in at an attractive 6.75 percent.

In Santa Clara County, Calif., where jumbo loans dominate the market, the number of homes sold dropped 25 percent in the past two weeks, says Richard Calhoun, broker-owner of Creekside Realty. Mr. Calhoun says he is telling buyers who need a jumbo loan that “they are probably better off waiting until rates come down.”Lower prices will help securing loans The latest troubles come as home prices have flattened or fallen in many areas and sales have stalled. Home prices will drop 2.9 percent this year and 5.7 percent next year, according to estimates by Fiserv Inc. unit Fiserv Lending Solutions and Moody’s Economy.com. Many of the metro areas that experienced home-price bubbles also have large numbers of jumbo-mortgage originations, notes David Stiff, chief economist of Fiserv Lending Solutions, and will likely be among the weakest markets going forward. The National Association of Realtors said Wednesday that existing home sales in the second quarter fell 10.8 percent from a year earlier.Some home sellers are lowering their asking prices to make it easier for would-be buyers to get a lower-cost mortgage. Alan Vallillo, a property manager, dropped the price of his three-bedroom, 2 1/2-bath condo in Trumbull, Conn., by $20,000 to $549,000 last weekend. The lower price will make it easier for a buyer with a down payment of roughly 25 percent to qualify for a conforming loan, says Mr. Vallillo’s broker, David D’Ausilio of Re/Max Heritage in Westport, Conn.

In addition, Mr. Vallillo, who plans to move into a new home in late September, is offering to buy down the interest rate on the buyer’s mortgage loan by two percentage points in the first year and one percentage point in year two. He says he hopes the interest rate buy-down will “spur (someone) to drop the price on their home so they can buy mine.”

Jason Godfroy, a teacher, recently set a $465,000 asking price for his four-bedroom colonial in Adamstown, Md., on the advice of his agent, John MacArthur. “To get people in, (they) had to be able to get a conforming loan” and not a jumbo mortgage, Mr. Godfroy says. With 10 percent down, “that puts you at $418,500.”

Rate increases as borrowing chips Some buyers are trying to use the rate increase as a bargaining chip. Jane Powers, a broker with Ewing & Clark Inc. in Seattle, says that one of her clients recently offered $1.7 million for a waterfront home listed at $1.995 million – and also asked the seller to provide financing. The buyer, who is self-employed, said that he was likely to need a loan that didn’t require him to document his income, which is getting tougher to find. “He was using it as leverage to try and get better terms,” Ms. Powers says. “It didn’t work.” David Stevens, who runs the mortgage-lending operation for Long & Foster Real Estate, based in Fairfax, Va., says he has “been fielding an unending series of phone calls” from agents who’ve been spooked by the troubles in the jumbo mortgage market. Mr. Stevens says he is telling agents that “financing is available, but is more limited” than it was a year ago, and the variations in pricing are greater. “It’s incumbent on the home buyer as well as the real-estate agent to do their shopping,” he says. He’s also advising jumbo borrowers to lock in a rate now in case the sector’s troubles last longer than expected.

Mortgage brokers and real-estate executives say the news in the jumbo market isn’t as gloomy as some may think, particularly for those with good credit who can document their income and assets. Although some lenders have raised their rates for jumbo 30-year fixed-rate loans to 8 percent or more, borrowers with good credit can still find loans for 7 percent or less from lenders looking to boost market share. “It’s as though there are two mortgage markets out there,” says Melissa Cohn, a mortgage broker in New York.Finding the best deal Determining which lender is offering the best deal can be tricky, as pricing and loan terms are changing daily. Making matters even more complicated, lenders such as Wells Fargo & Co. are offering better terms for jumbo loans originated by their retail branches and real-estate broker partners than those originated by mortgage brokers.Real-estate firms that operate their own mortgage units say they are bringing more deals in-house and looking for alternative sources of financing. When deals don’t close because the lender backs out, “we are bringing those people to our mortgage broker and we’re able to fund them in 48 hours,” says Jeff Barnett, vice president of Alain Pinel Realtors in Los Gatos, Calif. Lawrence Flick IV, chief executive of Prudential Fox & Roach, says he’s been looking to local savings and loans and local banks to fund more of the jumbo loans his firm originates.

Some would-be buyers are looking for creative ways to get around the higher rates. Joe and Sara Safdie, both college professors, have good credit and enough money for a 20 percent down payment on a home in San Diego in the mid-to-high $600,000 price range. But when the couple checked on mortgage rates last week, they were “appalled” by some of the quotes, Mr. Safdie says. To lower borrowing costs, the couple has decided to put 20 percent down, take out a $417,000 mortgage and finance the balance with a home-equity loan. “We have our financing in place,” says Mr. Safdie. “If a house comes up, we can move quickly. If it doesn’t, we’ll wait a little longer.”