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Jumbo mortgage troubles push ARM rates
higher
By Julie Haviv -Analysis
NEW YORK (Reuters) - Concerns about creditworthiness
in the U.S. mortgage market have helped to push up rates
on so called "jumbo" mortgages, and rates on
adjustable-rate mortgages saw a record rise this week.
The Mortgage Bankers Association (MBA) said on Wednesday
borrowing costs on 30-year fixed-rate mortgages dropped
to the lowest level in weeks, but rates on one-year adjustable-rate
mortgages (ARMs) rates surged to 6.51 percent from 5.84
percent in the week ended August 24.
The divergence in interest rates on fixed- and floating-rate
mortgages is the latest example of how problems are percolating
in the primary mortgage market.
Jay Brinkman, the MBA's vice president of research and
economics, said the jumbo mortgage market, where mortgages
are bigger than $417,000, is more to blame for the sharp
disparity on the two loan types than the "conforming" loans
that are guaranteed by Fannie Mae and Freddie Mac.
"The data reflects conforming loans as well as
jumbo loans, but the rate increases on jumbo loans were
enough to pull the one-year ARM rate up," he said,
adding that "higher jumbo rates were the main reason
as a high concentration of ARMs exist in the jumbo loan
market."
The rates for jumbo mortgages have been increasing as
investors command a bigger mark-up for loans that come
without any guarantees against default.
Interest rates on jumbo mortgages have jumped significantly
higher than loans guaranteed by housing finance giants,
Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie
Mac (FRE.N: Quote, Profile, Research).
The MBA said borrowing costs on 30-year fixed-rate mortgages,
excluding fees, averaged 6.41 percent, down 0.08 percentage
point from the previous week. Interest rates were above
year-ago levels of 6.39 percent. Fixed 15-year mortgage
rates averaged 6.10 percent, down from 6.20 percent the
previous week.
The data includes both "conforming" and jumbo
loans, with interest rates on 30-year fixed-rate mortgages
up only 0.9 percentage point from three months ago.
The average jumbo 30-year fixed rate, however, has soared
in recent months, reaching 7.4 percent last week, up
from 6.64 percent at the end of May, according to Bankrate.com.
"We have seen significant dislocations in the primary
mortgage market over the past couple of weeks," Alec
Crawford, head of MBS strategy at RBS Greenwich Capital
in Greenwich, Connecticut, said in commentary published
Wednesday.
The primary mortgage market, where loans get originated,
has changed significantly over the past few months. A
sharp rise in defaults in the subprime mortgage market,
which caters to borrowers with poor credit histories,
has caused lenders to tighten requirements, making it
difficult for those with weak credit to get a home loan.
Some market observers say even borrowers with an unblemished
credit history are having a more difficult time getting
a loan.
Over 30 mortgage lenders have gone out of business as
a result of rising defaults rates in the subprime mortgage
market.
The MBA said the ARM share of activity decreased to
15.0 percent last week, down from 18.6 percent the previous
week, its lowest level since July 2003, and in contrast
from where levels seen during the U.S. housing market's
heyday of above 30 percent.
"While this is not a very popular mortgage product,
it demonstrates the issues in the primary mortgage market," said
Crawford.
Steve Habetz, President of Threshold Mortgage in Westport,
Connecticut, said a relatively flat U.S. Treasury yield
curve, which happens when the yield between short- and
long-term securities narrow, has dampened a lot of the
rate incentive to take on an adjustable-rate mortgage.
"Second, some lenders are now qualifying borrowers
on the fully indexed rate instead of the start rate,
making adjustable rates more difficult to qualify for
than a fixed rate on the same size loan," he said. "In
fact, Minnesota has passed a law requiring lenders to
qualify borrowers in this manner."
The direction of interest rates is dependent on expectations
for U.S. Federal Reserve monetary policy which have been
changing regularly with the latest economic data and
credit market concerns.
"With sentiment surrounding Fed policy gyrating
on almost a daily basis, fixed-rate mortgages appear
to be the best option at this point of time," a
lender at one of the nation's largest home loan originators
said. "People are less willing to take on an ARM
at this point due to risk as well as higher rates. "
This comes at a time when "conforming" fixed
mortgage rates have fallen, while borrowers in high-cost
areas are seeing much higher rates.
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