Jumbo mortgage costs rise sharply across U.S.

When a client came to Homestar Mortgage looking to purchase a $1 million home in a waterfront area of South County recently, he learned there was some bad news.
Typically, a home purchase of that size requires a so-called “jumbo” home loan – one above the $417,000 threshold that makes it possible to sell it to federally chartered companies Freddie Mac or Fannie Mae.
The bad news was in the timing.
Stephen Tetzner, vice president at Homestar, said the broker could not find a mortgage with an interest rate lower than 7.625 percent. Just weeks before, the jumbo loan rates were about a percentage point lower.
Tetzner figured the difference tacked on another $600 to the homebuyer’s monthly mortgage payment.
“I’ve never seen it like this before,” Tetzner said last week, referring to the sizable spike in jumbo mortgage rates while conventional fixed rates are declining.
It is evidence that the subprime mortgage meltdown is creeping into other kinds of mortgages, ones designed to assist borrowers with good credit, primarily jumbo loans and so-called “Alt-A” home loans, which are non-conforming loans made to those deemed creditworthy.
In recent weeks, interest rates on jumbo loans have skyrocketed and Alt-A products – such as no-income-verification loans – have been curtailed or have been discontinued. Lenders are now adamant that borrowers meet increasingly strict guidelines for income and credit history.
And many homebuyers with good credit, even well-heeled ones, are feeling the crunch.
Tetzner and other brokers say it is all part of the fallout from a subprime mortgage market that has been riddled with foreclosures and defaults. The problems have forced the bankruptcy of lenders such as American Home Mortgage Investment, the 10th-largest home lender before it suddenly closed its operations earlier this month.
Such developments have made Wall Street skittish about mortgages, which are typically packaged into securities and sold to investors. “On the secondary market, they’re not purchasing the paper,” Tetzner said. “[The subprime situation] has dragged the jumbo market down with it.”
And the Alt-A market, too. These types of loans, generally considered between prime and subprime, were intended to assist people who might be self-employed and don’t have all the documentation required for a conventional mortgage.
While there have been some reports that defaults of Alt-A mortgages have been on the rise, some local brokers said the tightening of lenders’ purse strings might be an overreaction after several years of relaxed qualification guidelines.
“The pendulum has swung the other way, and it’s swung a little too far right now,” said Tim Petit, owner of MBA Home Mortgage Ltd. in Barrington.
Conventional 30-year fixed-rate loans remain relatively unscathed by the problems because they are considered less risky. They can be bought by Fannie Mae and Freddie Mac and repackaged as securities with an implied government guarantee.
But Alt-A and jumbo loans don’t fall into that category.
Lenders such as Wells Fargo, the nation’s fifth-largest bank, have curtailed issuance of Alt-A products; Wachovia, the fourth-largest bank, has stopped them entirely.
Late last week, Countrywide Financial Corp., the country’s largest mortgage lender, cut out most Alt-A and jumbo loan products as it borrowed $11.5 billion from 40 banks in an attempt to weather the credit market crisis.
Wells Fargo and others also have taken steps to hike jumbo rates because rattled investors aren’t buying them.
Tetzner said the spread between the 30-year fixed interest rate and the jumbo rate is usually about a quarter of a point. At one time this month, Tetzner said, the spread was nearly a full percentage point.
A survey at Bankrate.com last week found that that the average 30-year jumbo mortgage rate in Rhode Island was 7.08 percent, with one institution charging 9.875 percent. Bankrate.com said 30-year fixed mortgage interest rates in Rhode Island averaged 6.31 percent.
Paul Cappello, president of the Rhode Island Mortgage Bankers Association and senior vice president of lending at Pawtucket Credit Union, marveled at the rate increases in mortgage markets involving creditworthy borrowers.
“It really doesn’t seem to have anything to do with what’s going on in the market,” he said last week.
At Landmark Mortgage Lenders Corp., about 25 percent of the business is jumbo loans, according to George DeVine, Landmark’s president.
DeVine said last week that some of his clients looking to buy condos in a high-end waterfront complex in the southern part of the state are anxious about the tightening jumbo loan market. “They’re very concerned by what they’re seeing,” DeVine said.
Even so, DeVine said the spending is usually discretionary for those buying high-end homes. “They don’t have to buy,” he explained. “They buy because they want to buy.”
For that reason, DeVine is more concerned about the buyers in a lower-income bracket. “Those are the people that are going to be squeezed by the more restrictive requirements – the first-time homebuyers,” he said.
And that could further undermine an already cool housing market in Rhode Island.
Cecile Cohen, president of the Rhode Island Association of Realtors and a managing broker at Randall Realtors in Charlestown, said she hasn’t heard that the mortgage crunch has had much effect on buyers yet.
In fact, she said, many potential homebuyers are more educated about the mortgage process because of news media coverage of the subprime problems. Many are approaching real estate agents only after they have already been pre-approved for a mortgage, Cohen said.
And concerning jumbo loans, both Cohen and Sally Lapides, owner and president of Residential Properties Ltd., said that many of their clients buying high-end homes are paying cash anyway. “They don’t want any debt,” Lapides said.
It’s unknown how long the credit crunch will continue, but Tetzner predicted that the turmoil over jumbo loans will ease eventually. “But it’s not going to happen in the next few weeks,” he said. •