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Low-Risk Borrowers Now Feel Crunch

Real estate agents and economists say this could have a significant effect in the Washington area because the high prices here mean many borrowers use jumbo loans. The result, they say, might be further price drops because the rise in rates will mean less buying power.

"With a rate increase from 6.75 percent to 7.5 percent, the buyer's buying power just dropped by 10 percent," said Frank Borges LLosa, a broker at FranklyRealty.com. "That $600,000 buyer will now have to look at buying a $550,000 place or paying 10 percent more per month for the same house versus last week."

That's what happened with the Schors. They recently bid $675,000 for a six-bedroom house in Olney, instead of the higher amount they originally thought they would spend. They are still hoping they can find a mortgage lender that will offer a better rate.

Jay Seville, a real estate agent with Re/Max Allegiance in Arlington, has a client who just discovered that his monthly mortgage payment might increase by $200 if he goes through with his plans to buy a Clarendon condo. This week, Seville offered $550,000 for the two-bedroom, two-bathroom condo on behalf of his client. Now, he said, his client is wondering what to do.

"His cash-flow situation has changed in the last 36 hours. It's really causing him to reconsider," Seville said.

Some real estate agents, lenders and analysts played down the impact the rising rates will have, calling it a knee-jerk reaction. "We just need to get the volatility out of the marketplace," said Larry Pratt, president and chief executive of First Savings Mortgage in McLean.

They also pointed out that it is mostly mortgage brokers, not actual banks, that are so sharply raising rates on jumbo loans. That means a borrower who goes directly to a bank might get a lower rate. Still, Cecala noted, a large chunk of mortgages originate from non-bank lenders, also known as wholesale or correspondent lenders.

Others say prime borrowers are being unfairly penalized. The bulk of delinquencies have been among subprime borrowers.

"I think this will be a short-lived phenomenon, said Greg McBride, senior financial analyst at Bankrate.com. "It has no basis in delinquencies. Delinquencies on jumbo loans are still very low, and the wrong borrowers are being punished for the sins of others."

Staff writer Michael T. Shepard contributed to this report.


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