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.
“That makes sense if they want to eliminate the possibility of fudged paperwork from the brokers.”
I don’t want to pick on them directly because there are some good ones out there.
But yes that is what appears to be going on.
The major banks/mortgage lenders have really strict compliance and quality control things place.
Sometimes they seem to border on the ridiculous, but they are in place for a reason.
I agree, good brokers will hurt in the tightening up.
If someone can’t afford to buy a home using a solid conventional loan, not one of those zero principal, variable interest smoke and mirrors deals that were all the rage a few years ago, then they shouldn’t even think about buying.
I’m glad the sub-prime mortgage market finally crashed.
The fact that the Fed left the Prime Rate unchanged speaks volumes. Those wishing/needing to refinance are going to feel the full effect of the housing bust. I do not know the paper value of the total mortgages sold to WS, but their paper value is less than the stated value of comps.
As housing continues to slide, the effect on WS will be the same as in the 30s where credit was being used to finance deals. When credit tightens up, those holding worthless or less than face value contracts will be left out in the cold. It will be interesting if these holders call on the mortgage to be paid, if it can be legally done.
This has huge implications on our economy. Consumers are so much in debt, they have extracted “equity” from their homes to have fun. Using your home as a credit card to buy cars, clothes, boats, and other big ticket items is just plain stupid.
I’m not an expert int his area .. but the rates are not so steep .. it seems more like people are buying homes that are out of their price range
“it seems more like people are buying homes that are out of their price range”
It’s just that simple.
Yep .. heck I'd love to have a bigger home with all the bells and whistles .. but I also like to eat, send my kids to a good school and have a roof over our heads
I guess it's all about priorities and what's really important
Two seperate thoughts.
Subprime loans are not and never were the “exotic” negative amortization loans we heard about. Those are a seperate issue.
Subprime should return to what it was before. “Yeah, we’ll lend you money with your credit score. But, you need this, that, and this...” It’s the lack of the “this, that, and this” that created the problem.
Using exotic loans is fine, IF, you are still able to afford a “normal” conventional loan. Don’t do it if it’s the only way you can buy the house.
Perhaps the mechanic will now look for something he can afford.
You are right.
They can't. The holders face two risks - refinance if rates drop, and default, no matter what the rates do. Indeed, it is fairly rare for a lender to actually hold the whole mortgage. Loans are generally packaged and securitied.
Thazt is the deal, the mortgage brokers are screaming now because they cannot move the paper anymore.
Tight credit => deflation
Housing is going down
BUMP
How do you know he can’t afford it? There’s not enough other information there to know that.
And try finding a home in Croton-on-Hudson, or within 60 miles of there, for much less than that that a family could fit in.
DUH!!!
Oh, man...shades of Chavez. The only thing preventing any businessperson from offering a product at less than the cost of providing it is economic sanity. Again, it's not possible to lend money at a lower rate than cost of funds...and no, you can't make it up on volume.
Your irrational hatred of modern finance seems to have driven you around the bend.
For any reading this thread, who do so in the name of wanting to understand finance and mortgages more...this is not the place to look for knowledge. The poster is advocating financial voodoo.
Yes, but they'd make it up on volume, right? (/s)
That will also be news to all those investors, some retired, who bought CMOs...their contract is about to be violated.
You really don't understand the industry, do you? The turmoil we've seen on the alt-A and subprime side is among lenders, wholesalers who offer money to retail brokers.
A broker never owns the loan...the loan is made in the name of the lender, and closed in the name of the lender, with the lender's money, on the basis of the underwriting approval from the lender.
You appear to know just enough to be dangerous...to anyone taking you seriously.
But it’s not just the “evil” mortgage companies (I wish you’d stop calling me evil) suffering...it’s anyone who has concern for the value of their real estate, or the ability to sell it, or refinance it, or anything. The effects are a lot more far-reaching and the “I’ve got mine” attitude you have will disappear quick when your own financial portfolio starts to suffer.
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