Mortgage Fears Drive up Rates on Jumbo Loans

“Mortgage Fears Drive Up Rates On Jumbo Loans”

Abstract:

Mortgage market disruptions are causing lenders to raise mortgage rates on prime jumbo loans.

Summary:

The mayhem in the home loan mortgage market is beginning to squeeze high-end home buying consumers with good credit records, in the latest indication of rising unease among investors and mortgage lenders. Jumbo-mortgage rates are rising alarmingly despite long-term interest rates coming down. A prime 30-year fixed-rate jumbo loan now costs 7.34%, up more than 80bp (basis points) since mid-May. Jumbo loans, whose borrowers often possess high incomes and assets, are costing more than conforming loans because Wall Street has stopped buying them due to the higher risk factor. Jumbos are loans of more than $417,000, the limit observed by Freddie Mac and Fannie Mae, the government sponsored enterprises that buy loans in the secondary markets. 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.

American Home Mortgage Investment Corp., a large home lender catering to people considered good credit risks, completed its rapid decline Monday when it filed for Chapter 11 bankruptcy protection. The tenth largest mortgage lender in the U.S. finally surrendered to financial pressures caused by defaulting subprime mortgage loans. Several large U.S. mortgage lenders have also sought bankruptcy protection this year, but most catered to the riskiest, subprime borrowers.

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. Buyers will have to pay an extra premium, above already outsized home prices, to get a mortgage in New York, New Jersey, Washington, D.C., California and other high-priced markets.

Most lenders sell the mortgages they write to Wall Street investors so they can get more money to make more loans. But as defaults and delinquencies on all loans risen, those once-voracious investors have lost their appetites for mortgages. That caused lenders to tighten their standards. Borrowers with less-than-stellar profiles started getting