Mortgage crunch hits Bay Area hard because of jumbo loans

Mortgage crunch hits Bay Area hard because of jumbo loans
Carolyn Said,Kelly Zito, Chronicle Staff Writers
Thursday, August 9, 2007
Need a mortgage this month? It's going to be harder - and more expensive - to get one. In the past week, turmoil in the mortgage markets has caused increasing problems for home buyers in the Bay Area and around the nation.
Kurt Herrenbruck, a mortgage planner with Fishman Financial Group in Berkeley, saw one client's financing evaporate in the space of three days last week.
"The client is well-heeled, with (a high credit score), and $500,000 in the bank, making an owner-occupied purchase with a 25 percent down payment," Herrenbruck said. "He needs a no-doc loan (meaning he cannot provide documents to prove his income) because of an employment hiccup."
Herrenbruck said Wednesday he found two lenders willing to make a no-document loan. But by Thursday it was down to one. And Friday, when his client's offer was accepted, there was none. "He can't buy even though he had the strongest profile of any no-doc: superlative credit, money in the bank and a whopping down payment."
The story underscores how skittish Wall Street investors are causing a ripple effect that hurts multitudes of people buying or selling houses.
Simply put, less money is available for mortgages.
Most lenders sell the mortgages they write to Wall Street investors so they can get more money to make more loans. But as defaults and delinquencies on all loans - from exotic and risky to more traditional - have risen, those once-voracious investors have lost their appetites for mortgages. That caused lenders to tighten their standards. Borrowers with less-than-stellar profiles started getting rejections or had to pay much higher rates.
The credit crunch comes at a time when Bay Area homes already are changing hands at their slowest rate in 12 years, and in some areas, sales are off by 40 percent.
"It pushes on the brakes a little bit harder," Andrew LePage, a researcher at DataQuick, a real estate information firm.
This week, a raft of grim developments, with one big lender (American Home Mortgage) going bankrupt and five others ceasing to fund loans, has made the money supply much tighter, so that even borrowers with good credit and adequate resources are getting doors slammed in their faces or having to pay premiums.
A particular hardship for Bay Area home buyers: Lenders are charging top dollar to write nonconforming or jumbo loans - mortgages above $417,000.
"In the Bay Area, a substantial number of homeowners have jumbo loans because prices are so high," said David Berson, chief economist for Fannie Mae in Washington, D.C. For prime borrowers who need conforming loans under the $417,000 limit, there is not much change in the market, he said. But for everyone else, the changes are substantial.
Many lenders now only want to make loans that can be purchased by Fannie Mae or Freddie Mac, the two quasi-governmental entities that help provide liquidity in the mortgage market. Those two entities cannot buy jumbo mortgages.
"If your (mortgage) is above the Fannie Mae/Freddie Mac limit, even if you're a prime borrower, you will see a significant increase in the rates being charged," said Doug Duncan, chief economist with the Mortgage Bankers Association in Washington, D.C. "If you're not a prime borrower, you will have a hard time getting credit today."
Duncan said jumbo loans are carrying interest rates of 7.5 percent to 8 percent, 1 to 1.5 points higher than a month ago. "This is a big run-up, and we expect it to significantly delay the housing recovery, if it stays there for a while," he said.
Another category feeling the pain: Home buyers who can't make a 20 percent down payment.
Richmond real estate agent Marcus Hinds helped one first-time-buyer family find the perfect house - a $420,000 three-bedroom two-bathroom home. The three family members have good jobs as factory and assembly line workers, so the monthly payments are not a problem. But Hinds said they do not have a down payment, and few lenders want to fund a second loan.
"They're ready to close, all the contingencies have been removed, and they had approval on a first (mortgage), but there's a problem with the second," Hinds said. "Over the last week, the lender changed what they wanted ....
"They're scrambling to find someone else ... but they might have to walk away."
Getting a second mortgage is hard even at the upper end of the market.
Boris Morales, deal-desk manager at Residential Pacific Mortgage, a Walnut Creek midsize independent lender, said he had a well-qualified borrower buying a $2.5 million home in Greenbrae who wanted to put down 10 percent, borrowing 80 percent of the home's value in a first mortgage and 10 percent in a second mortgage.
"He had both (lined up) back in the middle of July," Morales said. "Both got approved and were moving forward. As of this week, (the investor) will no longer do second mortgages, period."
Residential Pacific will write the first mortgage, he said, but is scrambling to find an investor who will purchase the second. (The company sells all its mortgages.)
Mortgage brokers are also caught in the fallout.
Leon Huntting, a San Francisco mortgage broker, said his firm has had to eat some of the costs to keep some loans on track.
"We had clients to the point where we were ready to order loan docs and we'd get a call from a lender saying we don't have that program anymore," Huntting said. "So there were a number of loans where we gave up (our commissions) to honor the pricing they had."
Even large banks feel the crunch.
Profit margins are so thin in the lending market that eliminating the middleman is part of the new economic reality. In the past two weeks, Wells Fargo stopped offering riskier loans through other lenders or independent mortgage brokers but still offers those types of loans through its own branches.
"We can control the quality from start to finish because we're doing originating through closing," said Brad Blackwell, Wells Fargo Home Mortgage national sales manager.
Many experts said they think tighter standards are necessary to temper a lending market that had run amok, handing out loans to people with poor credit, no proof of income and few assets.
Ken Rosen, UC Berkeley economics professor, questioned whether those consumers should have been able to get mortgages over the past several years.
"If you have to get a loan with a low down payment, if you have to stretch, you shouldn't buy a house. Stay a renter," he said. "These loans allowed people to stretch and get loans they shouldn't have."
"We're getting back to basics, back to what we had prior to five or six years ago when we had a proliferation of new mortgage products," said San Francisco mortgage broker Ed Craine. "Borrowers won't be offered some of these loans or qualify for loans that can be problematic. That's the silver lining - unfortunately there are some people who are getting caught right now who are going to suffer."
Fannie Mae's Berson said the tightening mortgage situation is likely to hurt the already troubled housing market.
"There are people who could have qualified for a mortgage a month ago who can no longer get that mortgage," he said. "That means there will be fewer home sales or else people will have to buy less expensive homes. The practical impact is that some people will choose not to buy now. This is an additional negative factor on housing demand. It means home sales are likely to be weaker than we thought they would be just a few months ago."
Increase in loan rates, payments
An informal survey of interest rates for nonconforming loans (more than $417,000) found that the average rate on a 30-year, $500,000 fixed-rate loan - which had been 6.75% since early July - suddenly jumped to 7.5% this week.
The percentage is an average of what large lenders, including Washington Mutual, Wells Fargo, IndyMac, Bank of America and Citibank, have been charging for a 30-year, $500,000 fixed rate loan with a one point (1 percent, or $5,000) loan fee.
Aug. 1
Average monthly payment at 6.75%
$3,242.99
Aug. 8
Average monthly payment at 7.5%
$3,496.07
The increase in average monthly payment
$253.08
Fast-changing mortgage market
In recent weeks, lending criteria for home mortgages have tightened considerably, making it much more difficult - and expensive - to borrow when purchasing or refinancing a house. Here's how and why these changes came about:
-- Housing prices, after enjoying a huge run-up over several years, began cooling.
-- Many borrowers who had taken out mortgages with low teaser rates could not make payments when those rates reset. Mortgage delinquencies and defaults - especially in the subprime market - began rising.
-- The secondary market on Wall Street for subprime and other risky home loans dried up. (Most home loans are repackaged and sold to investors.)
-- Faced with nowhere to sell those loans and get fresh capital, scores of lenders all over the United States closed, went bankrupt or stopped making certain loans.
-- Fewer of the remaining lenders are offering second mortgages, 100 percent financing, loans to people with poor credit, or "no-doc" loans that require little evidence of income or assets, although many lenders say they are still funding loans to those with good incomes, large down payments and strong credit scores.
-- Consumers will pay higher loan fees to compensate for the fact that the market for repackaged loans is skittish and many lenders must keep loans in their own portfolios.
What you can do
With the mortgage situation changing day by day, it's hard to say what's best for consumers. One thing all experts agree on: If you don't have to be in the market right now, it might be best to wait this crisis out. If that's not an option for you, there are still places to get advice. For instance:
-- Bankrate.com: A free, online source of personal finance information that includes an entire section on mortgages, including local rate comparisons.
-- FDIC: The Federal Deposit Insurance Corp. provides comprehensive consumer advice on mortgages and home lending. Check its "Looking for the Best Mortgage" page for starters. You can find it at links.sfgate.com/ZOL.
-- The Federal Reserve: The Fed offers a great consumer overview of lending issues, particularly focusing on settlement charges. Check it at links.sfgate.com/ZOM.
-- The FTC: The Federal Trade Commission also offers an advice site for consumers navigating the mortgage market. Here's a shortcut to the site: links.sfgate.com/ZON.
Can't figure it out? Send us your questions
If you can't find the answer you're looking for at those sites, please send us your questions and we'll find the solutions for you. E-mail your inquiries to Bill Burnett, The Chronicle's real estate Editor, at bburnett@sfchronicle.com .
Source: Chronicle research