A jumbo mortgage is required for any amount above $417,000. Most any home in one of the real estate bubble areas would need a jumbo.
Interest rates on jumbos have just gone psychotic. Why? Because no one wants the risk and thus are pricing them high.
Today Countrywide published their new matrix of mortgage quotes. Suppose you are a successful doctor with solid income, huge pension account and almost maximum credit score. You want to buy a new primary residence for, say, $800k (which would be very, very modest 3 bedroom home in my area). You are putting 20% down and can show 2 months worth of payments on your checking account. Obviously you document your income, this is a full-doc loan.
What is your rate? It will be 7.9% for 5/25 ARM loan.
Now the real estate game is over, whatever happened before today was just a preparation for what will happen next.
When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.
The difference between those two rates, assuming 20% down, is $60,000 a year or $5,000 a month. The reason for such insane interest increases is not so much greed as it is fear. The credit markets are currently slamming shut.
When institutions won’t lend, that’s an opportunity for private party lenders– indivudals who’ve, say, decided the stock market is too risky and pulled their moeny out, or sold their real estate when it was high, and have cash to invest.
Admittedly the number of individuals who can fund a $1.5 million home on Long Island are few, and I’m certainly not one of them. But my point is, where there’s a demand, there will be a supply. If you could get 13% on a high quality secured loan, when the alternative is to put your cash in a money market for 4.75% or into a bumopy stock market with no security at all, that’s some serious incentive to get into the mortgage business!
I’ve been reading numerous financial blogs lately. Banks don’t finance mortgages any more. They create them, then immediately sell them to someone else who funds them. The secondary market in mortgages is what allows people to buy homes.
That secondary market is now virtually shut down. It’s comatose. They don’t want to write ANY mortgages now, that’s why jumbo rates are so high. No one knows which hedge fund or bank will start wobbling next.
“Banks don’t finance mortgages any more. ”
Not quite true. WaMu held on to our mortgage, and claims to hold almost all of its mortgages. Our local bank, State Bank of Southern Utah (I love them!) does the same. MOST banks do sell their mortgages, but there remain exceptions– and coincidentally (?) these tend to be the banks I like to do business with.
There’s also a thriving business in private lending. One of my clients does it– he loans money through a broker, who adds on a 1% fee on each payment collected. The loans are secured by real estate, though if one goes bad it’s hard to foreclose. Interest rates can be as much as 6% higher than a regular mortgage rate, which provides the investor with a significant cash flow.
Until now, these have typically been poor-risk, high-interest, secured loans on business property (like apartment buildings and motels). But as rates go up and credit tightens, I would expect this source of money would become available to lower-risk transactions in the residential market.
Sure, some big banks keep the mortgage, but most resell / repackage them into bonds and CDOs. And just because they are processing it and you send them the payments doesn’t mean they own it.
My real point is that the secondary market is dead right now.
And my point is that where there’s a demand, a supply will be found. In this case, a suppl already exists, it just needs to redirect.