Who’s afraid of a big, bad loan? Investors.
The fear of nonconforming loans – loans that aren’t backed by Fannie Mae or Freddie Mac – has sent investors running for the hills.
“Right now, there’s just no appetite in the secondary market,” said William Calderara, executive vice president of Fairfield County Bank. “I think a lot of hedge funds, [which] have been large buyers of mortgage-backed securities in the past, are feeling the pressure of the margin calls.” A margin call is a broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin.
“There’s a flood of assets on the market and no buyers,” Calderara continued. “I think you’re going to see that for some time.”
The implosion of the subprime mortgage market is scaring investors away from any loans that do not have the stamp of approval from either of the government-sponsored enterprises, the Federal National Mortgage Association (Fannie) or the Federal Home Loan Mortgage Corp. (Freddie). Jumbo loans – loans topping the GSEs’ conforming limit size of $417,000 set by the Office of Federal Housing Enterprise Oversight – have been lumped into the fright-fest.
In Fairfield County, where the median sales price of a single-family home dwarfs the conforming loan limit size, the changes in the market could affect where buyers go for their loans. Through the first half of the year, the county’s single-family median sales price was $574,500, and for the month of June alone, the figure was $629,500, according to The Warren Group, parent company of The Commercial Record.
Some national lenders have been struggling lately in the jumbo market, as investors take their money elsewhere.
For example, Calabasas, Calif.-based Countrywide Financial Corp., which recently announced 500 job cuts, also reportedly has stated its plans to reduce jumbo loans to 10 percent of its home lending, down from 50 percent earlier this year. Santa Fe, N.M.-based Thornburg Mortgage, described as a jumbo loan lender, meanwhile reportedly lost $930 million after a discounted sale of $20.5 billion of primarily AAA-rated mortgage-backed securities to raise cash.
Simply put, the mortgage problems in the secondary market are no longer confined to the subprime sector. And as national lenders struggle, some brokers are beginning to explore local options.
“I think [national lenders’ problems are] going to have a positive effect on the local banks,” said Mark Foreman, founder of Cornerstone Capital Mortgage and Real Estate Services in Fairfield. “The local banks are – we hope – a little more stable.”
Calderara agreed.
“Banks that don’t need to move the loans off the books are not going to be as affected,” Calderara said. Jumbo loans “are a big part of our business,” he added, noting that the bank typically holds the loans in its portfolio.
Recently, “we’ve noticed an increase in call volume and a slight increase in application volume,” Calderara said. The calls are coming from both borrowers and brokers, he said. But since the trouble in the jumbo market is relatively new, it is too early to know if the local banks will see a significant spike in business, he added.
Beyond simply finding a lender that is financially solvent, brokers have another reason for turning to local banks: the broker’s reputation.
“There’s nothing more devastating than showing up at a closing table and there’s no loan,” Foreman said.
‘Fairly Stable’
Borrowers showing up at the closing table may be disappointed at the prices being offered for jumbo loans. A recent report from Bankrate.com stated that the interest rate gap between conforming, 30-year fixed rate loans and 30-year jumbo loans is getting bigger.
Jumbo rates had been about 25 basis points – a basis point is one one-hundredth of a percentage point – above those of conforming loans, but lately the difference has jumped to 75 or more basis points. In mid-August, Bankrate.com reported the average 30-year conforming loan’s interest rate was 6.68 percent, while the average jumbo 30-year fixed rate was 7.43 percent.
“As the interest rates are rising, it’s taking some people out of the market,” Foreman said.
Buyers shopping in the jumbo market, however, may not be affected by higher interest rates to the same degree as low- and moderate-income buyers.
Borrowers who really have to stretch to purchase a house will be affected first, Calderara said. For borrowers who aren’t spending such a large percentage of their income on their mortgages, qualifying at a higher interest rate won’t be as difficult, he said.
But the higher interest rate on the loan might prompt a buyer to negotiate more with the seller on price, he added.
Foreman agreed.
“That’s something we started seeing in the early part of this year,” said Foreman, noting that his company does a lot of work with condo shoppers and first-time homebuyers. With the higher levels of inventory, buyers have known that they can shop around and negotiate, he said.
The number of single-family home sales in Fairfield County through the first half of 2007 is down 5.18 percent from last year to 4,336, according to The Warren Group. But Foreman doesn’t expect that investors’ recent fear of jumbo loans will further slow sales.
“It will have some effect, but I think there are a lot of buyers out there,” Foreman said. “I don’t really see this as a permanent thing.”
In addition, the county’s proximity to New York City will always help drive the market, he said.
“When you look at the overall health of the economy, the rest is fairly stable,” Foreman noted.
Finally, the secondary market itself could help breathe more life back into jumbo loans. The higher interest rates stemming from a higher sense of risk could be the key that lures investors back.
That could be attractive to investors seeking a better yield, Calderara said. Investors are looking now to see what they have in their portfolios: which parts are subprime, and which parts are jumbo, he added.
“Everybody’s doing kind of a revaluation and in a wait-and-see mode,” Calderara said.
