The Road to a Jumbo Mortgage Was Supposed to Get Easier

Despite an eager consumer base, it appears few such loans have been made, according to John Bancroft, executive editor of Inside Mortgage Finance. He expects activity to pick up as the market adjusts to the rules. “It’s going to take some time,” he said.

But time may run out at the end of the year, when the system is supposed to revert to the old rules. Not surprisingly, lenders and their secondary investors are hesitant about changing their business for a short time.

And rates have not dropped — at least not to the degree that many borrowers and mortgage brokers had expected. In some cases, “conforming” loans, so designated because they conform to the government-sponsored rules, are a full percentage point below the newly conforming jumbo loans intended to be covered by the new law.

“It’s a complete joke,” said Jose Lemus, president of Brymus Capital, a mortgage brokerage firm in Santa Ana, Calif. He said a buyer in Southern California looking to borrow $417,000 would pay an interest rate of 5.75 percent, while someone borrowing slightly more for a conforming jumbo loan would pay an interest rate of 6.99 percent.

For a jumbo loan that is not conforming, the rate could be as low as 7.35 percent for someone with excellent credit, Mr. Lemus said, but the rate for someone with average credit could be as high as 9 percent. “It’s getting harder by the day,” Mr. Lemus said.

Because the rates have not fallen as Mr. Lemus and his customers had hoped, he has not processed a single loan under the new rules.

Some prospective borrowers, like Nathan Menaged, 29, are skeptical that things will change. Mr. Menaged, a marketing consultant, owes about $574,000 on his Brooklyn home. He makes monthly payments of $4,000.

“I thought I had some good possibilities for getting into something more comfortable,” Mr. Menaged said of the new rules, which he has been tracking with great hope since January. But the interest rates on them remain prohibitively high. If rates had fallen as he expected, he hoped to lower his monthly payments by $1,000 — money he wanted to pay for his daughter’s tuition.

“It’s frustrating and it could become desperate if I don’t find an alternative in the near future,” he said. Members of the financial services community, including executives of major banks, investors and mortgage lenders, have said there are good reasons that rates are not dropping and more new-style jumbo loans are not being written. They say that jumbo rates — even “conforming” ones — are unlikely to fall completely in line with conforming rates.

The reason has to do with the way loans are sold and securitized. Conforming loans carry a lower interest rate in part because lenders can package and sell those loans as mortgage-backed securities directly to either Fannie Mae or Freddie Mac or to private investors who know that the housing finance agencies can buy them later. And some of those loans can be sold even before they are finalized because they qualify for the “to be announced” market that allows fixed-rate mortgage-backed securities to be traded freely as interchangeable commodities.

An influential trade group of the nation’s largest financial institutions, the Securities Industry and Financial Markets Association, recently made a key decision that some critics say has kept those rates from dropping. The association decided that loans above $417,000 — even those jumbo loans now considered by law as conforming — would not be eligible to participate in the “to be announced” market.

Sean Davy, a managing director at the trade association, said that lumping the new loans in with the smaller conforming ones could have created enough uncertainty and instability to drive up rates on the conventional loans.

But critics in Congress counter that lenders and the mortgage-backed securities industry have dragged their feet.

“I’ve been a little disappointed by the securitization people,” Representative Frank said. “What I’m told when I complain is that they have to iron out some wrinkles. It’s taken them longer to take advantage of this than I expected.”

Copyright © 2008 The New York Times

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