By JAMES R. HAGERTY
August 7, 2007; Page A1
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.
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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.
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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.
Middle Class people can afford $500,000-700,000 mortgages?? That's news to me. The note on $500,000 @ 7.3% = $3,427.85! $700,000 = $4,799.00! What is Middle Class anymore? To qualify for a $500,000 loan in the traditional model, a family would need a income of $166,666.66. That's over 80g's per parent.
Anyway, this move by Wells Fargo (and others to follow?) will cause asking prices to drop. According to Realtor.com, there are 8,706 SFR, condos, townhomes, and MFRs in the Chicago city limits that are above $450,000. There are a total of 41,555 units for sale right now in Chicago! The jumbos are 20% of the market. And guess where those units are? The Middle Class and better neighborhoods. Anyone that bought a jumbo loaned house in the last 2 years are, as of now, underwater.
6 comments:
the concept of affordability is completely out the window. you can barely find a one bed condo in the city for under $250,000 and people don't even blink at that price. you need to make $70,000 to buy a place like that. it's not like no one makes $70,000 but that's not the median, yet $250,000 is the median for a condo. that's out of line.
Jumbo loans have always been considered higher-risk, and in the not-distant past, borrowers were required to make much larger downpayments on "upper bracket" homes, as much as 50% on homes priced at %500K or more. They also had to have a bigger income in relation to the size of the loan-3X income would have been considered too high a loan-income ratio.
There were two reasons for this. For one thing, it is much harder to replace a high-paying job than it is an ordinary job. People who lose high-paying jobs mostly replace them with jobs paying substantially less. This means that not only is the buyer much more "fragile", but there is a much smaller market for the home, and more difficulty unloading it should a sale be necessary because of the borrower's inability to continue paying for it.
Secondly, when you buy a much larger home, your expenses don't increase in just one direction, they increase geometrically. So, you are not looking at just twice the monthly expense with a home costing $500K vs one costing $250K, you are looking at perhaps 3 times the monthly expense in mortgage, taxes (big item!), insurance, and maintainance.
Good...let the "high end crowd" get thrown out on their asses, due to foreclosures. Then maybe King Richard will actually acknowledge that there is no affordable housing in Chicago!!
it's not like no one makes $70,000 but that's not the median, yet $250,000 is the median for a condo. that's out of line.
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Good point. I have posted here that the median is about $48,000.
The North Coast said...
Jumbo loans have always been considered higher-risk, and in the not-distant past, borrowers were required to make much larger downpayments on "upper bracket" homes, as much as 50% on homes priced at %500K or more. They also had to have a bigger income in relation to the size of the loan-3X income would have been considered too high a loan-income ratio.
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I believe you are right, in the traditional model. However, in the last 5-7 years things were different. Do a search in 60631, the far NW side. Now we are not talking about Park Ridge or anything special, just old crappy ranches. They are all going for $450,000!
The jumbo loan starts at $417,000 I don't think that having an old kitchen and only a shack for a 1 car garage will deter the bank. The loan is the loan.
As I search realtor.com now, there had better not be one house for sale above $416,000. The sellers are not even paying attention. "A neighbor sold his house for 500 two years ago and by damn so am I!"
The condos down the street from me on Pratt, east of Sheridan, were offered to buyers at over $400K for a unit of about 1200 sq feet. The building is not quite sold out, but someone is reselling and trying to get the original offering.
At the other development further east, two bed two bath units, a very good rehab, are not selling at $259, and the developer is offering puny concessions, like $3K toward closing cost. Yet someone is trying to resell his unit for $333K.
Someone told me that his Rogers Park condo appreciated 5% since he bought it in 2006. With the kind of inventory overhang we have around here?
We have many millions of people who are deep in denial and delusion.
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