Growing mortgage crisis spreads to jumbo loans
The evening before their home purchase was to close, Gary Becker and his wife, Amy Dacus, learned their mortgage to buy a Woodinville home...
Seattle Times business reporter
Let's do the math | Jumbo loans start at $417,000. If the buyer has a 20 percent down payment, a house priced at just under $525,000 would require a jumbo loan anywhere in the Puget Sound area. Here are more facts about the local housing market:
7,584 houses for sale Aug. 24 priced over $524,999 in King, Snohomish and Pierce counties
679 condominiums for sale Aug. 24 priced over $524,999 in King, Snohomish and Pierce counties
8,731 houses sold so far this year in King, Snohomish and Pierce counties priced over $524,999
1,105 condominiums sold so far this year in King, Snohomish and Pierce counties priced over $524,999 Source: Windermere Real Estate
Mortgage-loan termsConventional: A loose term that generally refers to a fixed-rate conforming loan other than a Veterans Administration (VA) or Federal Housing Administration (FHA) loan. A 30-year, fixed-rate loan from a bank is an example of a conventional loan.
Adjustable: A mortgage with an interest rate that changes periodically, according to an "index," such as Treasury Bills. Monthly payments can go up or down when the rate is adjusted.
Jumbo: A mortgage for an amount greater than the amount eligible for purchase by Fannie Mae or Freddie Mac, the federally chartered companies that fund the bulk of the nation's mortgages. Their limit, which changes, is currently $417,000.
Subprime: A mortgage granted to a borrower with a less-than-perfect credit report. Lenders charge a higher interest rate to compensate for potential losses from customers who may run into trouble or default.
Sources: HSH Associates and Bankrate.com
The evening before their home purchase was to close, Gary Becker and his wife, Amy Dacus, learned their mortgage to buy a Woodinville home had evaporated.
Unlike subprime borrowers defaulting on loans, the couple had a stellar credit score, a 20 percent down payment, strong employment history and had effortlessly purchased three prior homes.
But their new home's $670,000 sales price was large enough to require a "jumbo" loan, so named because it was for more than $417,000, the limit the nation's largest mortgage backers will fund.
Their California mortgage broker had unexpectedly lost its ability to provide jumbos — an event being repeated by lenders nationwide as the underlying funding for these large loans grows scarcer.
"The sellers assumed we were a credit risk, which wasn't the case, and were reluctant to allow us extra time," Becker says.
In the last several weeks, the national mortgage crisis has spread beyond the subprime market to jumbo loans. This serious crack in the underpinnings of the mortgage industry threatens to stall home sales in the Seattle area, starting a chain reaction that eventually could impede sales all the way down to entry-level buyers.
Nearly half of the single-family houses for sale in King County, plus 21 percent of the condos, have sales prices high enough to require jumbo loans — and that's if buyers reduce their loan amount by putting 20 percent down.
Becker and Dacus and their children, ages 3, 5 and 7, had moved from Northern California so Becker could take a job as a senior business analyst with Microsoft.
Now it was Aug. 5 — the beginning of the week the jumbo-mortgage crisis erupted because a skittish Wall Street turned off the mortgage-money spigot — and their homebuying plans were in peril.
They'd spent their first five weeks here cooped up in a temporary third-floor apartment and had to be out in two days. Their furniture, on a moving van, was set for delivery to their new house soon thereafter.
Moreover, their $15,000 earnest money would be lost if the sale evaporated because they couldn't immediately find a replacement loan.
"Basically our plans blew up," says Becker, recalling the start of a sleepless night with much hanging in the balance, and "no idea what was going to happen next morning."
The next day, their real-estate agent, Ryan Rockwell of Coldwell Banker Bain, saved the deal by arranging an extension from the sellers and convincing a loan officer he knew that the couple was "more than qualified."
Hours later, Suzie Sparks, with Landover Mortgage in Bellevue, secured them a new jumbo mortgage.
"This is not the first deal I've seen that's shaky," Sparks says. "We hear it every single day from real-estate agents."
To get the same interest rate, 6.75 percent, that their original lender had quoted, Becker and Dacus opted to pay $2,800 in cash, the equivalent of a half-point (a point being 1 percent of their loan amount) to buy down their interest rate from the 7.25 percent that Sparks found for them.
"No investor appetite"
The credit crunch isn't universal.
Borrowers with good credit scores, good jobs and a down payment still have ready access to 30-year "conforming" loans — those funded through banks and mortgage brokerages by Fannie Mae and Freddie Mac, the giant federally chartered companies that fund the bulk of the nation's mortgages.
But Fannie and Freddie cap their loans at $417,000, which means that banks and mortgage companies must tap other sources, such as mortgage-backed securities, for jumbo funds.
In recent weeks a skittish Wall Street has loudly signaled its unwillingness to invest in these securities.
"Funding sources have dried up for all loan products except for conforming loan product," explains Erik Hand, president of Bellevue-based Response Mortgage. "Anything outside of those product types and your options are limited because there's no investor appetite for those loans anymore."
Jumbos have always had higher interest rates than conventional loans. Now with jumbo funding constricted, the spread has grown.
For example, last week the average jumbo-mortgage interest rate was 7.44 percent, while the rate for a conventional 30-year loan was 6.66 percent, according HSH, a New Jersey mortgage-information provider. On June 1, jumbos were going for an average of 6.60 percent and conventional loans were 6.42 percent.
Home purchases are almost always contingent on financing and "we're probably in something of a flattening [housing] market right now while we work through this," says Mike Skahen, owner of Lake & Co. Real Estate in North Seattle. "It makes me a little bit nervous because no one knows where it's going right now."
Last week, his office was handling a $1 million house purchase when the lender went bankrupt. "The buyer is looking for an alternative lender now, and hopefully she can find one," Skahen says.
At Coldwell Banker Bain's Lake Union office, managing broker Dick Fulton says his sales agents are scrutinizing loan-approval letters from lenders.
"We're making sure the buyers we work with are working with a lender who has verifiable and credible outlets for the money," Fulton says. "A buyer now who is working with a lender we've never heard of, we might scrutinize that a little more closely today."
From his high-rise office in HomeStreet Bank's downtown Seattle headquarters, residential-lending director Rich Bennion views the widespread mortgage crisis as "the inevitable correction for some of the excesses of the past several years."
The situation began in the wake of Sept. 11, 2001, when the Federal Reserve began cutting interest rates.
By 2003, interest rates were down to historic lows, and home buying took off. This presented enormous opportunities to lenders.
At the same time foreign capital began flowing into the U.S. in search of higher returns.
Bennion says investment houses responded by packing increasingly risky mortgage products into mortgage-backed securities and selling them on Wall Street, which clamored for more.
Mortgage lenders, and particularly mortgage brokers who make the majority of home loans, responded by offering subprime and other so-called exotic loans aimed at buyers who'd previously been excluded from homeownership: those with bad credit, no down payment or insufficient income to afford fixed-rate mortgage payments.
Simultaneously, the federal government mounted a push to increase homeownership by encouraging lenders to be creative in finding ways to get more people into homes. Opening the door to previously excluded buyers was seen as a good thing because it would increase the rate of ownership, considered a stabilizing influence for communities.
HomeStreet never offered subprime loans. Bennion says many "were risky and flew in the face of underwriting guidelines that had been developed over decades. It all seemed to work well — as long as house prices were appreciating."
Last year, appreciation stopped in various parts of the country, although not in Western Washington. Mortgage defaults began rising and loan companies began folding. Since 2006, more than 130 large lenders have gone under, including Merit Financial and MILA locally.
When will it end?
How much the jumbo problem will grow or when things will return to normal are unknown, although Keith Gumbinger, vice president of HSH, thinks the market could rebound in a few months.
"After investors get through repricing and reassessment of risk, and as they begin to look at jumbo mortgages for what they are — good credit quality, good-yielding investments when properly documented — the money will begin to return," Gumbinger predicts.
Meanwhile, Bennion suspects some consumers will shy away from buying altogether.
"They'll decide that instead of buying now, they'll wait a year. Or instead of buying now, they'll stay put and remodel the kitchen," he says. "It has a dampening effect on the housing market, no question."
Gary Becker and Amy Dacus are just happy their ordeal is over and they're in their new home.
"Now we're trying to get all our boxes unpacked," Becker says. "Those are fun things to worry about as opposed to where we're going to live tomorrow."
Elizabeth Rhodes: firstname.lastname@example.org
Copyright © 2007 The Seattle Times Company
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