Posted on 08/08/2007 8:02:48 AM PDT by Hydroshock
Turmoil in the U.S. home-mortgage market is starting to pinch even buyers of high-end homes with good credit records, in the latest sign of rising anxiety among lenders and investors.
This surge in rates on so-called jumbo loans is particularly notable because rates on 10-year Treasury bonds have been falling. Normally, mortgage rates move in tandem with Treasurys, but market jitters have caused investors to ditch mortgage securities.
Meanwhile, American Home Mortgage Investment Corp. finally succumbed yesterday to the mortgage-sector chaos that had crippled it in recent weeks and filed for protection from creditors under Chapter 11 of U.S. bankruptcy law. And executives at Fannie Mae, the government-sponsored entity that along with Freddie Mac provides funding for home loans, asked the companies' government overseer to raise the maximum amount of home mortgages and related securities Fannie can hold in its investment portfolio. The goal would be to boost demand for mortgages in general, proponents of the idea said.
Among other signs of distress, Aegis Mortgage Corp., Houston, notified mortgage brokers that it is unable to provide funds for loans already in the pipeline, a spokeswoman said. And Luminent Mortgage Capital Inc. of San Francisco said it faced calls for repayments from creditors and is suspending its dividend.
Lenders -- having already slashed lending to subprime borrowers, as those with weak credit records are known -- now are jacking up rates on jumbo mortgages for prime borrowers. These mortgages exceed the $417,000 limit for loans eligible for purchase and guarantee by Fannie and Freddie. They account for about 16% of the total mortgage market, according to Inside Mortgage Finance, a trade publication, and are especially prevalent in California, New Jersey, New York City, Washington, D.C., and other locales with high home costs.
Lenders were charging an average 7.34% for prime 30-year fixed-rate jumbo loans yesterday, according to a survey by financial publisher HSH Associates. That is up from an average of about 7.1% last week and 6.5% in mid-May.
The higher costs for such loans will put further downward pressure on home prices in areas where homes typically bought by middle-class people can easily cost $500,000 to $700,000.
Mortgages are typically packaged into securities and sold to investors. But as subprime weakness has made investors skittish, lenders are becoming more cautious in issuing mortgages. Though defaults have soared on subprime loans and are rising on Alt-A mortgages, a category between prime and subprime, losses on most types of prime mortgages have remained very low. Even so, lenders have raised rates on prime jumbo loans defensively because they are unsure what rattled investors may be willing to pay for them, said Doug Duncan, chief economist of the Mortgage Bankers Association.
The jump in jumbo-mortgage rates is the latest gust in a subprime storm that has sunk two hedge funds run by Bear Stearns Cos., knocked American Home and dozens of other lenders out of business, battered an already weak housing market and fueled weeks of stock-market turmoil. Yesterday, the Dow Jones Industrial Average rebounded 286.87 points, or 2.2%, to 13468.78.
Alarmed by weakness in the housing market and rising foreclosures, investors who buy loans and securities backed by mortgages have fled the market for almost any loan that isn't guaranteed by Fannie Mae or Freddie Mac, Mr. Duncan and others said. That means lenders must either hold loans, at least temporarily, and face the risk of falling values for them, or seek out borrowers who qualify for loans that can be purchased by Fannie and Freddie.
For other types of loans, Mr. Duncan said, "there is no market." He said it isn't clear how long the market will remain disrupted, but said some mortgage bankers fear the current paralysis could last weeks. "We're getting calls from members [of the lenders' association] who are quite desperate about their circumstances," Mr. Duncan said. Large banks have the capacity to retain loans on their books, but many other lenders can only make loans that can be sold quickly.
Since defaults on lower-grade mortgages began hitting worrisome levels late last year, several dozen lenders have closed. American Home, until recently the 10th-largest U.S. home-mortgage lender in terms of loan volume, was forced to stop lending and lay off most employees last week after the Melville, N.Y., firm's creditors cut off further funding and demanded repayments.
The latest mortgage ripples come as Federal Reserve policy makers prepare to meet today to discuss the economy and interest-rate policies. They are expected to keep the target for short-term interest rates at 5.25% and maintain their focus on holding down inflation, but acknowledge increased risk to economic growth from jitters in the credit market and the weak housing sector.
Pressure is likely to grow for the Fed and other regulators to take steps to reassure mortgage lenders and home buyers.
The Office of Federal Housing Enterprise Oversight, or Ofheo, which oversees Fannie and Freddie, last year ordered both mortgage issuers not to make any substantial increases in their holdings because of problems with accounting and financial controls at the two companies.
But Fannie officials have argued that raising the ceiling on their mortgage purchases could help calm turmoil in the mortgage market and avoid disruptions in the flow of credit, people familiar with the situation said.
A Fannie spokesman declined to comment, as did a spokeswoman for Ofheo. David Palombi, chief spokesman for Freddie, said one other possible response to the market turmoil would be to allow the two companies to buy larger mortgages, those above the current $417,000 cap.
Ofheo's director, James Lockhart, has said the two companies have made progress in redressing their accounting and financial-control problems but need further improvement. That view could be an impediment to raising the cap.
The market disruption came as crushing news for Gary Cecere, a mechanic who lives in Croton-on-Hudson, N.Y. Mr. Cecere said he learned yesterday that Wells Fargo & Co. was no longer willing to complete a planned package of two mortgage loans that would allow him to buy a $410,000 four-bedroom home in Mahopac, N.Y. Hugo Iodice, a branch manager at Manhattan Mortgage Co. who is acting as a loan broker for Mr. Cecere, blamed tighter standards imposed by Wells Fargo on Alt-A loans. A Wells Fargo spokesman had no immediate comment.
"I was getting ready to close [on the home purchase] this week, and they basically pulled the carpet out from under my feet," said Mr. Cecere. For now, he said, his wife, five children, two cats and a dog are cramped into a two-bedroom temporary apartment, awaiting a move. Mr. Iodice said he is trying to find an alternative loan for the family.
Even borrowers with good credit records who can afford a large down payment are finding rates surprisingly steep if they can't qualify for a loan that can be sold to Fannie or Freddie. Rates on prime jumbo loans have risen so fast that "nobody in their right mind would pull the trigger" and accept one now, unless they couldn't delay a home purchase, said Darren Weisberg, president of PFG Mortgage Services Inc., a mortgage broker in Lake Forest, Ill.
Some lenders are pulling the plug on whole categories of loans. Yesterday, National City Corp., a Cleveland banking company, said it has suspended its offerings of home-equity loans or lines of credit made through brokers rather than the bank's branches. The company cited market conditions.
First dose of castor oil.
Um, why am I supposed to feel sorry for a mechanic that can’t afford a 400,000 house exactly? I couldn’t afford a 400,000 mortgage and I KNOW I make more than a mechanic.
The purpose here it to get you to feel sorry for people. I am talking about sound banking and economic policy. And again I say it is very hypocritical of many who for years have decried any form of governmental regulations or intervention to now be screaming for if, like Mr. Cramer is. What is stopping the mortgage companies from offering to convert all the arms to 30 fixed loans at 4% interest. Nothing, but the fact that it does not help them it helps the home owners. They do not care about the homeowners as they claim. They are running scared.
Free needles for addicts in Amsterdam helps prevent AIDS, too.
Oh, brother. Cue the violins.
Trying, I’m really trying to figure out your angle...I see ‘peat’ and ‘repeat’ on all these threads. You have any original thoughts?
2 things.
1. They sold all the loans already.
2. Fed Funds rate is 5.25% so if they borrowed at 5.25 to lend at 4 they'd lose their shirts.
You have no clue about either. You want the Federal Reserve to be cruel to people you don't like on your behalf.
Exactly...amazing...
Exactly!!! It is not as many claim to easy the pain but it is about unloading the paper. This train wreck is going to happen, nothing can stop it now.
No I do not want them to be cruel to people, but I also do not want to run up the deficit and institute unsound monitary policy to bail out the people or the mortgage industry. Besides inflationis teh greater worry.
And the articles themselves are incorrect. Go to a major lender directly (Wells Fargo , BofA) and you won’t pay those higher rates.
The major lenders are raising the rates “through brokers”, not directly
Your proclamation that you don't want to hurt and punish people is unconvincing.
If I knew how, I’d upload a picture of an elephant.
See "train wreck" is where you and I part ways, at least in degree.
This very real problem is a financial one, not an economic one.
If the 6-8 million most at risk homeowners walk away from their mortgages it will be due to their foolishness in selecting foolish loan options, not due to sudden unemployment. So yes the bond holders get killed, the mortgage brokers get downsized, home builders languish, property values stagnate or in some places sink but everyone still goes to work, goes to the mall, buys their next car etc. There are just more renters out there, that's all.
So ya the 20% of the economy is financials get killed but it is business as usual for the other 80%
That makes sense if they want to eliminate the possibility of fudged paperwork from the brokers. In other words the brokers won't be sending them any more business.
Facts are of little importance here.
Don’t be too sure about that. They’re higher overall, but brokers are getting the short end of the stick here.
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