Rates dip, but few bite at mega-mortgages

  • Article by: SUZANNE ZIEGLER
  • Updated: April 11, 2009 - 4:16 PM

Jumbo loans usually carry interest rate a bit above smaller loans, but disparity now is huge.

With rates for jumbo mortgages drifting down, is a corresponding dent being made in the glut of high-end homes on the market? This year, not even a small one.

Jumbo mortgages -- a mortgage of $417,000 or more -- have stringent requirements, including hefty down payments. Also, buyers are still gun-shy, waiting to see if the real estate market has bottomed out, and few people these days want to commit to a big house payment.

"No one wants to take $250,000 or $500,000 out of their brokerage account when it's down 50 percent to come up with the gargantuan down payment you need for a jumbo mortgage right now," said Erik Hendrikson, president of Tradition Mortgage in Edina. "So it's this whole combination ... that has created a lot of quiet in that high-end market."

Steve Havig, president of the Minneapolis Area Association of Realtors and owner of Lakes Area Realty in Minneapolis, said he has not seen an impact from lower jumbo rates. "I'm in Kenwood. The majority of our housing stock would be in the jumbo price range," he said. "It has been a slow, slow launch for the spring [jumbo] market."

Rates for 30-year fixed-rate jumbo mortgages have dropped from an average of 7.28 percent a year ago to 6.44 percent last week, the lowest since April 2007, according to HSH Associates, which tracks consumer loan information. Rates for smaller 30-year mortgages were averaging 4.97 percent last week.

Jumbo mortgages are those too large to be backed by the federal government through Fannie Mae and Freddie Mac. Mortgages that are under those limits -- usually $417,000 -- are called "conforming" loans. The conforming loan limit has been bumped up in some high-cost areas of the country, such as Boston, but not in Minnesota.

Jumbo rates are also higher because the secondary market -- where mortgages are sold to generate new funds -- has dried up. Now, lenders need to keep loans on their own books, assuming the risk themselves.

"It's kind of back to an old-school, risk-averse banking model -- the lender is keenly interested in the quality of the loan and will it be repaid," said Alex Stenback, a mortgage banker with Residential Mortgage Group in Minnetonka. "It's definitely a stricter set of standards than what we were seeing just two years ago -- the bar has been moved higher."

Keith Gumbinger of HSH, which is based in New Jersey, said the difference between conforming and jumbo mortgage rates used to run around one-fourth of a percentage point, or 25 basis points. "So if a conforming rate was 5 percent, a jumbo would be around 5¼. Right now, that gap is extraordinarily wide. Last week, it was exactly 150 basis points."

The Federal Reserve's influence to lower conforming mortgage rates has produced the larger gap, he said. "The gap remains extraordinarily wide, not because jumbos aren't doing their part. They are. But because other prices have been artificially influenced lower."

He advised anyone looking for a mortgage or to refinance to shop around more than ever. "Some lenders are in a better position to make you a competitive loan than others. You've got to go out and scour around your marketplace. Shop it effectively."

Some large lenders, including Bank of America, are starting to promote jumbo rates below 6 percent. "We decided it was time to really go after that market," said Vijay Lala, a product management executive for the bank.

Options are available

Stenback said some customers hoping to buy more expensive homes or who want to refinance can split the loan. "You can get a conforming first mortgage at 4.625 percent, give or take, and come behind it with a second mortgage or home-equity line of credit for a couple hundred thousand dollars at 5 percent. This gets you a jumbo amount, without paying the premium required of a true jumbo loan," he said. "That's a strategy a lot of people are using as an alternative."

There are limits to that strategy. A second mortgage above $250,000 is "awfully hard to get," he said, and effectively caps the sales price at $830,000 if the buyer is putting 20 percent down.

Abundance of homes

In the Twin Cities' 13-county region, sales of homes between $500,000 and $1 million dropped 24.9 percent in the past 12 months, from 2,389 to 1,795. Sales of $1 million-plus homes fell 25.3 percent, according to the Minneapolis Area Association of Realtors. There are 2,394 homes listed for $500,000 to $1 million on the market now, down 14.8 percent from a year ago, and 787 $1 million-plus houses on the market, up 1.7 percent from a year ago.

Gumbinger said the combination of falling home prices and lower mortgage rates improves the affordability of higher-end properties.

"Remember that the price has already gone down by 10 or 15 or 20 percent and could easily leg down another 10 percent. There is a concern about, 'Do I jump into the market now or do I wait until more clear signs that price bottoming has come?'"

Havig, of Lakes Area Realty, said timing is everything. "The concern about waiting for the bottom is the only way you know you've hit bottom is when it is on the way up."

Dow Jones News Service contributed to this report. Suzanne Ziegler • 612-673-1707

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