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Home Buyers Forced to Change Tactics
Tammy Arbogast, her husband, Derrick Fouts, and sons Gabriel, left, and Eli, have outgrown their Germantown townhouse. The changing mortgage market has delayed their plans to buy a larger house they've had their eye on.
(By Katherine Frey -- The Washington Post)
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Loans that meet Fannie and Freddie rules are called "conforming" loans, and they are about the only types of mortgages that investors want to buy now because they are perceived as safe bets.
Investors lost their appetite for non-conforming loans soon after subprime borrowers, typically those with poor credit, started defaulting on their loans at an alarming rate this year.
Jumbo loans are not nearly as risky as subprime loans, but they too are non-conforming and also suffered when investors yanked their money out of the non-conforming market. With investors' money gone, many firms specializing in jumbo loans were left with little money to fund mortgages.
Some shut down, including a unit of Capital One of McLean, which closed last week. Others stopped making loans, as Thornburg Mortgage did this month. Countrywide Financial, IndyMac Bancorp and other large lenders are getting more selective about who gets jumbo loans.
Many lenders reacted by simply raising their rates. Some did it to offset investor concerns by offering better returns for their money. Some also wanted to pull back on granting those loans until they could find investors to buy them on the secondary market.
That led to a widening gap between jumbo and conforming loans in recent weeks, making the former more expensive. While jumbo rates were rising, a conforming 30-year fixed-rate loan is the lowest it has been since June.
Lenders were charging an average 7.46 percent for prime 30-year, fixed-rate jumbo loans last week, compared with 6.57 percent for conforming loans, according to mortgage research firm HSH Associates.
That's why consumers are angling for conforming loans and why some lenders are accommodating them with such options as the piggyback.
But a piggyback mortgage is tougher to find for people with less-than-stellar credit. And sometimes the math does not work out even for those who qualify for that arrangement, said Steve Calem, vice president of real estate lending at American Bank of Rockville.
For people buying homes of $1 million or more, a second loan may be so large that the combined rate of the two loans far exceeds the jumbo loan rate, Calem said. Second mortgages are more risky for lenders and typically carry higher rates than first mortgages.
"You really need to know how to cut these things up to get the best rate," Calem said. "A little bit more on the first or a little bit less on the second could add thousands of dollars to closing costs and interest expenses for the consumer."
The numbers did not work in Mike Stidham's favor. Stidham was approved for a jumbo loan that fell through a day before he was to settle on a $560,000 home near Baltimore.
