Home Buyers Forced to Change Tactics
Wednesday, August 29, 2007
The credit crunch has turned $417,000 into the magic number for home buyers shopping for mortgages.
Rattled investors have become reluctant to buy loans for more than that amount -- known as jumbo mortgages -- and that in turn has pushed some lenders to raise interest rates. Caught in the middle are potential home buyers who are getting walloped by higher rates or shut out of the market.
The phenomenon is particularly significant in Washington, where half the homes sell for more than $417,000. Here, home buyers are figuring out how to adapt to the new circumstances by making larger down payments or splitting their purchase into two loans to dodge higher rates. Others are sitting tight until the rates go down.
The course they take can have deep implications for the mortgage industry, the housing sector, and by extension, the economy. If too many potential jumbo-loan borrowers wait it out, chances are the excess supply of homes on the market will swell, further dragging down prices. Home values fell in 15 of 20 large metropolitan areas in the second quarter from a year earlier, according to a report yesterday from S&P/Case-Shiller. They fell 7 percent in the Washington area.
About 24 percent of mortgages granted in the District, 14 percent in Virginia, and 10 percent in Maryland were jumbo loans in 2005, according to the most recent Mortgage Bankers Association data available. Sixteen percent of all new mortgages last year were jumbo loans, according to the trade publication Inside Mortgage Finance.
"Lenders are all putting our collective heads together to come up with a new way to get borrowers into houses," said Bill McGoey, a senior vice president at American Partners Bank, owned by the thrift holding company Federal City Bancorp of the District. "There are tools that we've been using forever, but we've had to tweak them to suit the current situation."
That tweaking benefited Melissa Pool, who took out a jumbo loan to purchase a new $950,000 loft in Arlington. Her father, Otis Pool, helped arrange the logistics but said the experience "kind of put me in a tizzy."
Pool said his daughter signed a contract for the loft a few months ago while it was under construction, but as the closing date approached and the jumbo rates jumped, her mortgage company, First Savings Mortgage, arranged an alternative.
Her loan officer advised her to apply for a piggyback mortgage, meaning two loans. She made a $350,000 down payment, as planned. Then she split the remaining $600,000 between a first loan for $417,000 and a second at a higher interest rate for the balance.
The combined rate of the two, 6.875 percent, was about half a percentage point lower than the jumbo loan would have been, the mortgage company said.
So what's so special about a $417,000 loan?
Fannie Mae and Freddie Mac by law can purchase or guarantee loans for single-family homes up to that amount. The limit is determined annually by federal regulators based on the average home price nationwide from October to October. Some members of Congress want to increase the limit in light of the current mortgage problems.