Mortgage Market Primed For Trouble: Crunch & Squeeze

Here's another reason to worry about the housing market: It's getting harder and more expensive to get a mortgage.

AP Mortgages are costing more and are harder to get.

Because of a growing "credit crunch," lenders are tightening standards and raising mortgage rates for people with average or below-average credit ratings. Even homeowners with good credit scores are seeing higher rates on so-called jumbo loans--those that range from roughly $400,000 to $600,000, depending on which part of the country you live in.

"Banks want to see higher credit scores and more money in the bank and larger downpayments," says Melissa Cohn, chief executive of Manhattan Mortgage, a New York mortgage broker.   

For those with good credit scores of 700 or above, mortgage rates have actually eased lately because of the decline in the 10-year Treasury yield, the traditional benchmark for many mortgage rates. But for everyone else, banks are no longer using the 10-year Treasury as a guide but raising rates on their own.

The reason: investors are more reluctant to buy mortgage-backed securities because of the rising default rate, so banks are forced to offer higher rates to sell the mortgages they originate. This so-called "risk premium" is being passed on to consumers with less-than-stellar credit histories.

"If lenders can't sell loans they have, there is no choice but to offer mortgages at a higher rate to homeowners," Cohn says. "It has nothing to do with bond market yields right now".

As an example, Cohn says that even someone with a high credit score could pay as much as 8.25% for a jumbo 30-year loan. That's well above the conventional 30-year fixed mortgage rate, which currently average 6.26%, according to Bankrate.com.

A broker originated jumbo loan through Wells Fargo is carrying at interest rate of 8%, up from 6.875% last week. Prime jumbo loans accounted for about 12% of the mortgages granted last year, according to Inside Mortgage Finance.

"The mortgage market is like a diving board," according to Greg McBride, senior financial analyst at Bankrate.com. Those with the lowest credit scores are farther out on the board because they're the riskiest borrowers, and so they pay the highest rates.