Jumbo Mortgages Caught Up In Subprime Mortgage Fallout

DALLAS TEXAS - April 18 2008 - For months, mortgage lenders have been backing away from borrowers with spotty credit, all but closing down the so-called subprime mortgage market.

More surprisingly, they’ve also been increasingly loath to lend to high-end borrowers who might want to finance a home in tony Preston Hollow, say, or the Park Cities.

That means doctors, lawyers, business owners and corporate execs looking for jumbo mortgages – those more than $417,000 – are apt to pay significantly higher interest rates than people with similar credit scores in line for smaller loans.

“When the subprime mess came to full fruition, jumbo loans got thrown in with all the subprime loans,” said Tom Parker, president of Home Team Mortgage, the in-house mortgage company of Ebby Halliday Realtors. “The liquidity not only for subprime loans dried up, but also for jumbo loans.”

That’s reflected in the divergence of two key interest rates over the last 12 months.

A year ago, a 30-year fixed-rate jumbo came with an average rate of about 7 percent in Dallas, according to Bankrate.com.

That was only slightly higher than the 6.75 percent someone might pay on a smaller mortgage with otherwise comparable terms, known in the industry as “conforming” loans.

Since then, conforming loans have gotten cheaper, with average interest rates plunging to 6 percent or less. But jumbos have become pricier, with interest rates ranging above 7.5 percent in recent weeks before dropping to a bit above 7.25 percent earlier this week.

The difference adds up, and many say higher jumbo costs are contributing to a growing slump in the local high-end home market, which is seeing declines in sales and prices.

If jumbo loans had drifted down to 6 percent, a person taking out a $500,000 fixed-rate mortgage for 30 years would pay just under $3,000 a month in principal and interest, or nearly $1.08 million over the life of the loan.

At 7.5 percent, the same borrower would shell out almost $500 more each month – and an extra $180,000 over the life of the loan.

Thinking twice

That math made Dr. Clayton Roberts think twice about taking out a 30-year fixed-rate loan when refinancing his Preston Hollow home recently, even though that was the only kind of mortgage he had used in 15 years of home ownership.

Dr. Roberts, 48, a Dallas anesthesiologist, wanted to combine two home loans to cut his monthly payment. He had taken out a loan last year to build a pool and pay for a landscaping project. But with the high interest rates on fixed-rate jumbos, “it just doesn’t make sense,” he said.

Instead, the doctor ventured into unfamiliar territory, opting for a jumbo loan on which he pays only interest for five years, at a rate of about 6 percent. After that, he will have to pay off the outstanding principal and interest over 25 years, at an interest rate that will be determined later.

Dr. Roberts knows such adjustable-rate mortgages have gotten many borrowers in trouble.

But by reducing his monthly payments during the next five years, he thinks he can apply the savings to reduce the loan’s principal by a greater amount.

“I’m going for the ARM to pay down the principal balance,” he explained.

Dr. Roberts is not the only one following that strategy, despite the risk that interest rates could rise, said Gary Akright, president of Dominion Mortgage Corp. in Dallas.

“One way you can do it is to take an interest-only feature,” he said. “Are you subject to rate volatility? Absolutely.”

Prime jumbo mortgages are actually less risky than conforming mortgages of the same quality.

In January, about 1.3 percent of prime jumbo mortgages were 60 days or more past due, compared with 2.2 percent of prime conforming mortgages, according to First American CoreLogic Inc.’s LoanPerformance, which tracks mortgage data.

But jumbo delinquencies are rising rapidly. In January 2007, less than 0.6 percent of prime jumbo loans were delinquent by 60 days or more. That means the percentage of troubled jumbo loans has more than doubled in 12 months.

Moreover, lenders feel safer making the smaller conforming loans because they can sell them to government-sponsored entities such as the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corp., Freddie Mac.

Loans above $417,000 can generally be sold only to private investors, at least for mortgages made in Texas.

Congress is temporarily allowing government-sponsored entities to buy mortgages of up to $729,750 in pricey markets such as Los Angeles and New York (and even larger loans in a few other markets). But those rules do not apply to Texas, where homes cost less.

Shying away

But many investors now shy away from mortgage-backed securities, given the recent credit problems.

About $19 billion in private-label securities backed by jumbo mortgages was issued between October and December last year, according to government data. That was less than half the amount issued between July and September.

“There’s no appetite on Wall Street to buy those notes anymore,” said Mike Anderson, CEO of Reliance Mortgage Co. in Dallas. “I don’t care what the quality is.”

Jumbo mortgages caught up in subprime fallout
by BRENDAN M. CASE | The Dallas Morning News