Sub-prime borrowers not alone
It’s not just sub-prime borrowers who are having trouble getting affordable home loans.
Because mortgage investors stung by growing defaults in the sub-prime sector are shunning all but the most traditional loans, creditworthy borrowers are getting hammered if they want mortgages with payment options or the “jumbo” loans used routinely in Southern California and other high-priced home markets.
If you get such a loan, you’ll pay a higher rate than before. And to add insult to injury, it’s taking more time for all mortgages to get approved and funded, market experts say.
Rancho Palos Verdes marketing consultant Steve Ammons discovered the new jumbo reality after he began shopping for a mortgage on a Manhattan Beach home that he and his daughter own and rent out.
Ammons and his daughter have credit scores of 750 to 760, he said Wednesday, making them prime borrowers, the most creditworthy. What’s more, the house is worth an estimated $1.6 million and has a current $650,000 mortgage, so there is plenty of equity to serve as a cushion for the lender.
Ammons is looking for a 30-year, fixed-rate mortgage, but with a twist -- the option to pay only the interest on the loan during the first 10 years. Such loans have been widely used by landlords seeking to maximize their cash flows. Ammons said a jumbo loan with an interest-only option that he took out just last year on another rental property had an interest rate of 5.5%.
But the story was different this time: A loan officer at Washington Mutual Inc. quoted him a rate of 9.75%, saying that the lender “had to charge such high rates so that they could sell off the loans,” said Ammons, who has since put off refinancing.
“It’s rough out there,” said Doug Duncan, chief economist for the Mortgage Bankers Assn. He blamed “the absence of a securitization market,” in which lenders sell loans and investors buy them in the form of mortgage-backed securities.
That market has practically vanished because investors who bought mortgage-backed bonds and other instruments during the housing boom feel betrayed by the lenders, Wall Street banks and rating firms that teamed to create, certify and market supposedly safe securities out of sub-prime loans.
Except for certain banks that keep large mortgages on their books, and charge a premium for that service, “No one’s buying mortgage-backed securities that are backed by jumbo loans,” Duncan said.
Government-sponsored mortgage finance giants Freddie Mac and Fannie Mae are still buying loans and securitizing them, but only if the loan amount is $417,000 or less. Anything more is a jumbo loan.
As investor demand for nonconforming loans has dried up, rates on jumbo loans have shot up this month even though rates have declined on smaller loans. As of Friday, jumbo borrowers were paying nearly nine-tenths of a percentage point more than conforming borrowers were, according to HSH Associates, a Pompton Plains, N.J., mortgage data publisher.
This week, borrowers were paying a full percentage point more for jumbos than for smaller loans, said Laguna Niguel mortgage broker Jeff Lazerson. About two-thirds of Lazerson’s clients get jumbo loans.
In California, the median price of a single-family detached home last month was $586,030, the California Assn. of Realtors said. As a result, to get a conforming loan -- one that meets Fannie Mae and Freddie Mac’s standards -- a buyer would need a down payment of $169,030, or 29% of the home’s value.
Plus, any kind of payment option, such as the ability to pay interest only, automatically makes the loan nonconforming, regardless of its size.
In a sign of how out of whack things have become, the Mortgage Bankers Assn. reported Wednesday that 30-year, fixed-rate prime loans were averaging 6.41%, lower than the 6.51% average for one-year adjustable-rate loans.
Adjustable loans normally have lower rates because the ability to reset payments makes them less risky for lenders. But because more jumbo loans have adjustable rates, a jump in jumbo rates lifted the average rate on adjustables, the lender association said.
Beyond jumbo loans, the rise in interest rates for other mortgages that don’t conform to the standards of Fannie Mae and Freddie Mac has been even more pronounced, Lazerson said.
For example, in the sub-prime market for people with poor credit, fixed-rate mortgages that were in the 7% to 8% range six months ago can still be had, but only at 9% to 11%, Lazerson said.
And anyone with a credit score under 620 “is now automatically sub-prime,” he said.
Previously, some “alt-A” loans, the category between prime and sub-prime, were available for borrowers with credit scores as low as 600. Unlike many sub-prime loans, the alt-A loans did not have prepayment penalties or big jumps in interest rates after two years.
“These are very spooky times for borrowers trying to find mortgages and even for mortgage brokers trying to find mortgages off the beaten path,” Lazerson said.
And because lenders are demanding more documentation of borrowers’ financial condition, it is taking longer for mortgages to get funded, Duncan said.
San Diego mortgage banker John Robbins, chairman of the national mortgage bankers group, said he saw hope for the jumbo loan market’s recovery. But he said borrowers such as Ammons were going to “have to be patient for a month or two.”
“This market is going to come back,” Robbins said. “For a gentleman like this with a lot of equity in his house, just trying to stabilize his mortgage payments, I don’t think help is too far away.”