In early February, Congress gave beleaguered mortgage borrowers a rare cause for celebration. As part of the economic stimulus package, it passed rules intended to make it easier and less expensive for people to take out hefty loans in the nation’s costliest housing markets.
Economists and legislators said that helping tens of thousands of borrowers take out billions of dollars in new loans could stanch the bleeding in the housing market, spur spending and reduce the pain of a likely recession.
Instead, the effort to make it easier to get jumbo mortgages — loans over $417,000 — has yielded frustration and disillusionment.
Since the rules took effect April 1, many prospective borrowers and their mortgage brokers say the new loans are either not available or the rates are far higher than they expected. Relief, they say, has been replaced by grief.
The program “is so much of a failure that it’s really unbelievable,” said Daniel M. Shlufman, president of the FCMC Mortgage Corporation in Clifton, N.J. Mr. Shlufman likened Congress’s effort to “coming up with a vaccine to a terrible disease, and then not giving it to people, or making it too expensive.”
Under the new rules, a sizable number of jumbo loan would be treated by the mortgage industry in the same way as smaller conventional loans. This change — raising the ceiling for loans backed by government-sponsored housing finance agencies to nearly $730,000 in the nation’s costliest locations — was intended to bring rates down for more borrowers and stimulate the lending that is needed to get the economy moving again.
The goal of making most of these jumbo loans accessible was aimed not at helping subprime borrowers, those people with spotty credit histories. Rather, it was meant for borrowers with good credit and ample down payments, but who wanted to buy a house or refinance a home loan in the costliest housing markets, like New York, San Francisco, Anchorage, Baltimore, Edwards, Colo., and Jackson, Wyo.
In such markets, a two-bedroom home can easily cost more than $1 million.
But the real concern over this program’s failure goes beyond people seeking million-dollar homes. The danger, economists say, is in how a wave of foreclosures and rising inventory of homes for sale will deepen and prolong the economic downturn started by the subprime mortgage crisis.
In 2007, around 14 percent of new loans were jumbos, compared with 8 percent for subprime and 48 percent for traditional conforming loans, according to Inside Mortgage Finance, a newsletter that tracks mortgage activity.
Robert Edelstein, a professor at the Haas School of Business at the University of California, Berkeley, said that it is essential to a healthy economy that jumbo borrowers in these upper-tier markets are able to get financing. “There could be a contagion,” he said, as the subprime woes “move up the chain.”
“The housing market has to stabilize,” he said. “And in these markets large loans are needed because the values are big.”
Members of Congress and people in the mortgage-backed securities industry remain optimistic about the new rules. They say it is too soon to declare success or failure. Relief, they insist, remains around the corner. They argue that the credit market that fuels home ownership must be given time to adapt to rule changes that affect billions in potential loans.
This month, Freddie Mac, one of the two main government-chartered companies (along with Fannie Mae) that helps the housing market by purchasing loans in bulk from lenders, said that over the next year, it would buy up to $15 billion of the jumbo loans. That change and others that may follow, optimists argue, could lead to more loans and bring down interest rates.
“We’re getting some benefit but not as much as I’d hoped,” said Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee. “That will change shortly,” he said an interview. “I am confident that within a month or less, it will be fully operational.”
Freddie Mac estimates the new rules could encourage $40 billion or more in loans by year’s end, which it estimates could finance new mortgages or mortgage refinancings for 50,000 or more borrowers.
"It's a complete joke."
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.”