Suddenly, those million-dollar homes are getting harder to buy and sell.
Wall Street’s anxiety over defaults and foreclosures in the subprime market, which let millions of people buy homes with little or no money down and adjustable-rate mortgages, has leaped to “jumbo” mortgages too large to be purchased by government- sponsored agencies Fannie Mae and Freddie Mac.
A jumbo loan is any home loan larger than $417,000.
One result: The wealthy homebuyer borrowing $1 million is facing a higher interest rate than the middle-class buyer borrowing $300,000.
In Colorado, lenders and mortgage advisers say money is still available for luxury homes. But the pool of investors has dwindled, the terms are tougher, and the interest price is higher.
The investors willing to buy jumbo loans “have dropped from hundreds … to maybe a handful,” said Pete Lansing, president of Universal Lending, a Denver mortgage-banking company.
“And the qualification and underwriting of those loans has gotten much tighter and more restrictive,” he said. “Now, they have to put down at least 20 percent. You have to be able to document the ability of repayment. They’re not willing to take the risk on just the real estate alone.”
Slowing sales
Zach Donahue, a mortgage consultant at Cherry Creek Mortgage in Denver, suspects the sudden credit squeeze has slowed sales of high-end homes.
Real estate agents “are having some trouble selling those,” he said. “They’re not moving as quickly, for sure. And the amount of showings has been a lot less.”
Buying a million-dollar home with less than 20 percent down “is going to be much harder,” he said. “People are now going to be forced to withdraw money from stocks and other asset accounts and put more money into their mortgage. And it is going to cost them more in interest.”
While interest rates on conventional loans eligible for the Fannie Mae pool have dropped below 7 percent, some lenders have bumped rates to 8 percent or more on jumbo loans.
The credit pendulum “has been stuck on easy for five years,” said Lou Barnes, an owner of Boulder West mortgage bank. “What it has done in the last three weeks is swing way beyond neutral.”
As a result, any loan larger than $417,000 “is tremendously harder to get than it was three weeks ago,” Barnes said.
“If you happen to be salaried and wanted to buy a million- dollar house, you have fine credit, money in reserve, you’ll qualify. If you were a successful attorney who left a law firm to open his own practice, you might have a very hard time because of your new self-employment.”
Creative financing
Lenders are finding creative alternatives for borrowers just over the jumbo line. The buyer needing $500,000, for example, may get a $417,000 Fannie Mae loan at 6.75 percent interest and an $83,000 second mortgage at 8 percent.
Colorado real estate experts say they have seen few luxury- home sales canceled because of the jump in jumbo-loan rates. But they fear the long- term effects if rates remain high, partly because builders also depend on those loans.
Ultimately, they hope the mortgage-securities market will distinguish lenders with impeccable records from those with risky products and high delinquency rates.
“It’s an odd market reaction,” said Jon Goodman, a real estate lawyer in Boulder. “A $600,000 mortgage on a million-dollar property is a safe loan. Much safer than a $200,000 mortgage on a $200,000 property.”
Staff writer David Olinger can be reached at 303-954-1498 or dolinger@denverpost.com.
