New Jersey Real Estate Report

From the NY Times:

In a Credit Crisis, Large Mortgages Grow Costly

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.

“I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.

“There is a lot of fear in the markets,” he added. “When there is fear, people have a tendency to overreact.”

The investment banker’s problem was that he was taking out a so-called jumbo mortgage — a loan greater than the $417,000 mortgage that can be sold to the federally chartered enterprises, Freddie Mac and Fannie Mae. The market for large mortgages has suddenly dried up.

For months after problems appeared in the subprime mortgage market — loans to customers with less-than-sterling credit — government officials and others voiced confidence that the problem could be contained to such loans. But now it has spread to other kinds of mortgages, and credit markets and stock markets around the world are showing the effects.

Those with poor credit, whether companies or individuals, are finding it much harder to borrow, if they can at all. It appears that many homeowners who want to refinance their mortgages — often because their old mortgages are about to require sharply higher monthly payments — will be unable to do so.

Some economists are trimming their growth outlook for the this year, fearing that businesses and consumers will curtail spending.

“In the last 60 days, we’ve seen a substantial reduction in mortgage availability,” said Robert Barbera, the chief economist of ITG, a brokerage firm. “That in turn suggests that home purchases will fall further. Rising home prices were the oil that greased the wheel of this engine of growth, and falling home prices are the sand in the gears that are causing it to grind to a halt.”

At the heart of the contagion problem is the combination of complexity and leverage. The securities that financed the rapid expansion of mortgage lending were hard to understand, and some of those who owned them had borrowed so much that even a small drop in value put pressure on them to raise cash.

“You find surprising linkages that you never would have expected,” said Richard Bookstaber, a former hedge fund manager and author of a new book, “A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation.”

From the Hartford Courant:

Death Of Zero-Down

In the latest sign that the nationwide credit crunch is worsening, lenders are saying no to borrowers who want no-money-down mortgages.

The popular financing option – which required no down payments and financed 100 percent of a home loan – is being eliminated or strictly curtailed by lenders across the country and in Connecticut.

That means buyers will once again have to come up with cash for a down payment, at a minimum 3 percent of the purchase price but as much as 10 percent, to avoid costly mortgage insurance premiums that can add hundreds of dollars to a monthly payment.

The change is expected to hit first-time buyers hardest. That, in turn, would sap buyers from an already weakened market where the supply of houses and condominiums far outpaces demand.

Mortgage lending standards have already tightened for many borrowers in 2007, particularly those with spotty credit histories, the so-called subprime market. But a wide-ranging elimination of the zero-down-payment mortgages is a signal that the crunch is spreading more broadly, to those with a solid record of paying bills but who don’t have a lot saved for a down payment.

“If someone walks in today with an A-plus credit history and a $200,000 salary but no money for a down payment, I can’t help them anymore,” said Michael Menatian, president of Sanborn Mortgage Corp. in West Hartford.

The company was notified by its lender this week that the lender will no longer cover no-money-down loans.
…
So far, Sheahan said, the squeeze hasn’t crossed into traditional mortgage products that include a down payment. However, in the last week, borrowing rates for large, “jumbo” mortgages have soared by one percentage point, rising above 8 percent, which had a chilling effect on that part of the market as well, Sheahan said.

The move by lenders away from the zero-down mortgages will not just affect people of modest means. It will also squeeze young professionals, such as doctors or lawyers, who have high salaries but little money for a down payment because of costly student loans.

“It’s going to have a big impact on the market,” said Menatian. “It’s tough enough to buy in this area, where prices are high and the cost of living is high. But now, in order to get a good loan, you are going to have to come up with 5 to 10 percent in cash.”

And that’s something that not every buyer wants to do.
…
With a strong housing market where prices were climbing, lenders were willing to look the other way on these deals, the mortgage brokers said.

“Now, with values dropping, if someone got into trouble, they might just walk away” from the house, Menatian said, because they’ve got no money of their own tied up in it.

That would leave lenders stuck with a loss. And that prospect is spooking lenders already rocked by turmoil after the collapse this year of the subprime mortgage market. That industry swelled to $1.3 trillion over the past few years, fueled by Wall Street’s easy money. But as home prices sagged and more borrowers missed payments on loans, the industry buckled.

From the Wall Street Journal:

New Laws Needed to Curb Unscrupulous Brokers
August 9, 2007; Page A11
…
Charles E. Schumer
U.S. Senator (D., N.Y.)
Washington

As I have learned over the course of conducting several hearings on the subprime industry, the lack of any oversight or accountability for mortgage brokers has led to an unprecedented amount of fraud and unfair dealing. Unscrupulous brokers have inflated appraisals, misrepresented the cost of loans and induced borrowers to take out loans they cannot repay. And under the current regulatory system, these practices will not be stopped.

New laws, such as those that I am fighting for in the subprime lending industry, aren’t needed for the thousands of responsible, ethical lenders operating in the subprime industry today. Nor are they needed for the secondary markets, which will self-correct. New laws are needed for the irresponsible, unethical mortgage brokers who have taken advantage of lax oversight to rip off borrowers in such gigantic volumes that we are now staring down the barrel of the largest home foreclosure crisis in history.

And these borrowers are not the young men and women looking to buy their first home, as Mr. Lindsey portrays. Rather, they are often elderly and financially vulnerable existing homeowners who were convinced to refinance their mortgages with reckless adjustable rate loans. According to the Center for Responsible Lending, only 9% of subprime loans went to first-time buyers in the nine years through 2006.

Market liquidity is rapidly eroding because investor confidence in subprime products has hit rock bottom and the way to restore that confidence is to put tough measures in place to hinder fraud and enhance the integrity of subprime mortgage products. If mortgage brokers were held responsible for the consequences of their bad advice, we would not be facing the credit crunch Mr. Lindsey and I both bemoan today.

From the Wall Street Journal:

Fannie Mae to the Rescue
August 8, 2007; Page A12

With Wall Street openly lobbying for someone to ride to its rescue in the credit markets, the news is that Fannie Mae and Freddie Mac have offered to step into the breach — for a price. Their offer deserves to be treated with the same skepticism as their claims some years back about bullet-proof accounting.

The irony here is that Congress chartered Fannie and Freddie expressly to expand access to “affordable” housing. Yet the two mortgage giants have long sought their profit opportunities in the more credit-worthy segments of the market. Yes, their regulator requires them to do some business in the low end of the market, but the “low end” is defined pretty generously, and Fan and Fred have tended to do the minimum necessary to keep Congress and regulators off their backs.

In other words, the whole subprime lending industry, the securitization of those loans and their sale to investors is the product of private innovation. The same goes for so-called jumbo mortgages (which have been too big for Fan and Fred to securitize). Everyone agrees that there have been excesses in that market — for which these companies are paying a price in reduced earnings, or bankruptcy. But our point is that real expansion of available credit to less-than-ideal borrowers owes little to Congress’s favorite “affordable housing” giants.

Now, however, Fannie and Freddie are suddenly saying they can be white knights for a jittery, illiquid mortgage market. And no doubt with their government-backed borrowings, they could provide some liquidity in the short term. But their offer comes with a big catch. The Journal reports that Fannie has asked regulators to lift the cap on the size of their portfolios of mortgage-backed securities (MBSs).

Freddie, meanwhile, wants permission to buy larger mortgages than is currently allowed — so-called jumbo mortgages that, on account of their size, tend to go to the well-heeled. Because their mission is supposedly “affordable housing,” Fannie and Freddie are currently limited to buying mortgages of no more than $417,000. Their friends on Capitol Hill have been trying to raise this so-called conforming-loan limit through legislation, but Freddie Mac sees the current turmoil as a way to get access to the biggest mortgages and play savior at the same time. Beauty.

Regulators capped the companies’ MBS portfolios in the wake of accounting scandals, and the companies have wanted them lifted ever since. Amid the current widening of credit spreads, Fannie no doubt sees an opportunity to step in and grab market share that it has lost while the cap has been in place. But the types of loans Fan and Fred are likely to buy are not the ones that have been in distress recently, since those loans don’t meet their underwriting requirements.

From the Wall Street Journal:

Mortgage Fears
Drive Up Rates
On Jumbo Loans
By JAMES R. HAGERTY
August 7, 2007; Page A1

Turmoil in the U.S. home-mortgage market is starting to pinch even buyers of high-end homes with good credit records, in the latest sign of rising anxiety among lenders and investors.

This surge in rates on so-called jumbo loans is particularly notable because rates on 10-year Treasury bonds have been falling. Normally, mortgage rates move in tandem with Treasurys, but market jitters have caused investors to ditch mortgage securities.

Meanwhile, American Home Mortgage Investment Corp. finally succumbed yesterday to the mortgage-sector chaos that had crippled it in recent weeks and filed for protection from creditors under Chapter 11 of U.S. bankruptcy law. And executives at Fannie Mae, the government-sponsored entity that along with Freddie Mac provides funding for home loans, asked the companies’ government overseer to raise the maximum amount of home mortgages and related securities Fannie can hold in its investment portfolio. The goal would be to boost demand for mortgages in general, proponents of the idea said.
…
Lenders — having already slashed lending to subprime borrowers, as those with weak credit records are known — now are jacking up rates on jumbo mortgages for prime borrowers. These mortgages exceed the $417,000 limit for loans eligible for purchase and guarantee by Fannie and Freddie. They account for about 16% of the total mortgage market, according to Inside Mortgage Finance, a trade publication, and are especially prevalent in California, New Jersey, New York City, Washington, D.C., and other locales with high home costs.

Lenders were charging an average 7.34% for prime 30-year fixed-rate jumbo loans yesterday, according to a survey by financial publisher HSH Associates. That is up from an average of about 7.1% last week and 6.5% in mid-May.

The higher costs for such loans will put further downward pressure on home prices in areas where homes typically bought by middle-class people can easily cost $500,000 to $700,000.
…
The jump in jumbo-mortgage rates is the latest gust in a subprime storm that has sunk two hedge funds run by Bear Stearns Cos., knocked American Home and dozens of other lenders out of business, battered an already weak housing market and fueled weeks of stock-market turmoil. Yesterday, the Dow Jones Industrial Average rebounded 286.87 points, or 2.2%, to 13468.78.

Alarmed by weakness in the housing market and rising foreclosures, investors who buy loans and securities backed by mortgages have fled the market for almost any loan that isn’t guaranteed by Fannie Mae or Freddie Mac, Mr. Duncan and others said. That means lenders must either hold loans, at least temporarily, and face the risk of falling values for them, or seek out borrowers who qualify for loans that can be purchased by Fannie and Freddie.

For other types of loans, Mr. Duncan said, “there is no market.” He said it isn’t clear how long the market will remain disrupted, but said some mortgage bankers fear the current paralysis could last weeks. “We’re getting calls from members [of the lenders’ association] who are quite desperate about their circumstances,” Mr. Duncan said. Large banks have the capacity to retain loans on their books, but many other lenders can only make loans that can be sold quickly.
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The market disruption came as crushing news for Gary Cecere, a mechanic who lives in Croton-on-Hudson, N.Y. Mr. Cecere said he learned yesterday that Wells Fargo & Co. was no longer willing to complete a planned package of two mortgage loans that would allow him to buy a $410,000 four-bedroom home in Mahopac, N.Y. Hugo Iodice, a branch manager at Manhattan Mortgage Co. who is acting as a loan broker for Mr. Cecere, blamed tighter standards imposed by Wells Fargo on Alt-A loans. A Wells Fargo spokesman had no immediate comment.

“I was getting ready to close [on the home purchase] this week, and they basically pulled the carpet out from under my feet,” said Mr. Cecere. For now, he said, his wife, five children, two cats and a dog are cramped into a two-bedroom temporary apartment, awaiting a move. Mr. Iodice said he is trying to find an alternative loan for the family.

Even borrowers with good credit records who can afford a large down payment are finding rates surprisingly steep if they can’t qualify for a loan that can be sold to Fannie or Freddie. Rates on prime jumbo loans have risen so fast that “nobody in their right mind would pull the trigger” and accept one now, unless they couldn’t delay a home purchase, said Darren Weisberg, president of PFG Mortgage Services Inc., a mortgage broker in Lake Forest, Ill.

Some lenders are pulling the plug on whole categories of loans. Yesterday, National City Corp., a Cleveland banking company, said it has suspended its offerings of home-equity loans or lines of credit made through brokers rather than the bank’s branches. The company cited market conditions.