Dollars and Jens
Tuesday, August 07, 2007
My brother mentioned a piece of news over the weekend by which I believe he meant that Wells Fargo raised its basic jumbo mortgage rate by a dramatic amount last week.
Wells Fargo, one of the nation's biggest mortgage lenders, raised the interest rates on it 30-year, fixed-rate, non-conforming (AKA jumbo) loan to 8 percent last week, up from 6.875 percent. Other lenders followed suit and more are likely to join them.Incidentally, if I needed to borrow $500,000, could I break that into a $400,000, conforming first mortgage and a $100,000 second mortgage?
...Jumbos are loans of more than $417,000, the limit observed by Freddie Mac and Fannie Mae, the government sponsored enterprises (GSEs) that buy loans in the secondary markets. Freddie and Fannie don't buy loans above that cap.
[J]umbo borrowers are paying a point and a half more than those who receive a conforming loan. That's way up from the traditional premium spread of about a half to three/quarters of a point.That big a spread would make the split worth doing even if you have to pay 11% on the second mortgage.
Even borrowers with shakier credit scores than many jumbo loan applicants can qualify for a prime loan at about 6.75 percent, only 0.25 or 0.30 percent above what more qualified borrowers get, according to Keith Gumbinger, of HSH Associates, a mortgage information publisher.If that's purely liquidity premium, it seems like an awful lot of liquidity premium:
But jumbo borrowers are paying a point and a half more than those who receive a conforming loan. That's way up from the traditional premium spread of about a half to three/quarters of a point.
Why should jumbos, whose borrowers often boast high incomes and assets, cost more than conforming loans? It's because Wall Street has stopped buying the loans.
Conforming mortgages, or loans below $417,000, carry much lower risk, because Freddie Mac and Fannie Mae guarantee a market for them. 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.
A buyer with a budget of $4,000 a month may be able to afford a $600,000 mortgage at 6.875 percent, but with jumbos up to 8 percent, a buyer with the same budget can only afford a $545,000 mortgage.I won't get into why the math I'm about to do isn't quite on point, but if an investor can take on an illiquid asset that is likely to rise 10% as soon as liquidity conditions return to normal — and one on which most of the risk can be hedged or diversified — that seems awfully attractive; I'd think if you held onto this for 2 to 3 years, you'd beat LIBOR by 3% per year at low risk, and I'm sure there are ways of leveraging that up.
Or maybe, at the moment, there aren't:
As far as non-conforming loans are concerned, "We are seeing essentially a frozen market," said Jay Brinkman, the Mortgage Bankers Association vice president for research and economics. "When lenders can't get a bid even on the AAA loans, it's a market that has ceased to function."I still think there's a bit of baby starting to go the way of the bathwater in this market.