The Curse of the Were-Rabbit!

After praising Floyd Norris, we are confronted with this!

In a Credit Crisis, Large Mortgages Grow Costly - New York Times: by Floyd Norris and Eric Dash: 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.... 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....

The Wall Street investment banker who wanted a jumbo mortgage had a good credit score, and is not a subprime borrower. But private mortgage securities are now hard to sell, leading to his problem.... [T]he average jumbo rate is now 6.94 percent. The spread between the two rates [conforming and jumbo] rose from less than a quarter of a percentage point to more than two-thirds of a point. Jumbo mortgages are most important in areas with high home prices, most notably on the East and West coasts. “In California, it has shut down the purchase market,” said Jeff Jaye, a mortgage broker in the Bay area. “It has shut down the refi market.”...

Fannie Mae and Freddie Mac, the government-sponsored enterprises, can still purchase mortgages and issue securities, guaranteeing that the underlying mortgages will not default. Those guarantees are still accepted by investors, and borrowers who meet their standards — meaning they can get so-called conforming mortgages — still can borrow. But those who want larger mortgages, or cannot make down payments, face a harder burden...

The investment banker's problem is not that he is taking out a so-called jumbo mortgage. The investment banker's problem is that he--must be a he--was putting so little money down that the lender was not confident it could resell the house in two years for the amount of the mortgage if necessary, and the lender was also not confident that the investment banker would have a job in six months. As Norris and Dash say later on in the article: the average jumbo mortgage rate is 6.94%--not 13.

Comments

[AP]

As Norris and Dash say later on in the article: the average jumbo mortgage rate is 6.94%--not 13.

Right. And they tell you that the difference between a conforming loan and a jumbo loan changed by less than half a percent, a jump that's supposed to explain a near doubling of a jumbo loan interest rate.

And excuse me, but given that median home prices in most major American cities is near or above a half-million dollars, implying that jumbo loans are exotic creatures is completely bogus. They've got to be a huge fraction of home mortgages.

[David Lloyd-Jones]

Wazzamatta? The dumb bastid can't mortgage the coach house and the servants' quarters separately, to get under the $417K maximum?

Sheesh, with dummies like that out there, no wonder Wall Street teeters.

[AP]

Duncan Black insists he saw an alternate version of this article which explained that the broker was trying to get a no-doc loan.

[Gray]

"The investment banker's problem is that he--must be a he--was putting so little money down that the lender was not confident it could resell the house in two years for the amount of the mortgage if necessary, and the lender was also not confident that the investment banker would have a job in six months."

Sure. Who knows if this guy still has his job next months? And the house could easily lose 25% in equity now that the bubble has blown up. And I guess AP is right: This might be a no doc loan. Isn't the bigger part of an investment managers income bonusses and options? And wouldn't this result in him being a Alt-A candidate for mortgages? I guess that technically, this isn't subprime, but after all those flippers flopping the (remaining) mortgage instituions aren't overly enthusiastic about such clients, either.

[David Lloyd-Jones]

AP and Gray,

I guess you're right: any soi disant "investment banker" who doesn't have a mil and a half in cash in the cookie jar can't really be a functioning citizen, now, can he?

[Gray]

Prof DeLong, Sebastian Mallaby has a new story on the similarities between former bubbles like the junk bond craze and the recent mortgage hype:
http://www.washingtonpost.com/wp-dyn/content/article/2007/08/12/AR2007081200815.html

Not a bad article, imho, but since you pointed out many Mallaby flaws in the past, I'm interested in your opinion.
:-)

[Gray]

"any soi disant "investment banker" who doesn't have a mil and a half in cash in the cookie jar can't really be a functioning citizen, now, can he?"

Hehehe!
No, but I'm surprised he would be willing to go on record stating he needs a mortgage to buy his dream house. What will the collegues say?
:D

[a different chris]

>What will the collegues say?

Actually that's what they expect.

Now, here in post-Reagan America I'm not surprised that a Wall Street banker somehow can't manage to save up a half-mil downpayment - hey, there are expensive cars and top-shelf dinners and exotic vacations with the wife or/and mistress, guy can't just sit around can he? - but:

What those at the club would really find embarrassing is if he put more than the absolute minimum down. That would be tacit acknowledgement that he, an investment banker, sucks at his job.

Look: Number 1, a mortgage is the cheapest money you can borrow. Number 2, he's not even paying 7%, he gets to deduct his interest payments off his top-bracket income tax (at least a good chunk, there is some upper limit IIRC unless the Rethugs have repealed it).

So if they guy takes X dollars out of his cookie jar, he's basically telling his peers that "I'm not good enough at my job to be sure I can get 7% in the market with my own cash over the next 30 years".

Number 3, the government protects homeowners, the more suburban and upscale the more protection. Even if you go bankrupt you can usually shield your "principle" residence.

Nobody in finance puts any money down on a house if they can avoid it.

[mpowell]

a different chris,

Sure, but I wouldn't think that would hold if the loan was for 13%. Wouldn't the solution just be for him to add more to the down payment until the rate comes down to something reasonable? I think what everyone else has noticed, is that there is probably a lot more to this story.

[zaleriana]

A few things:

1. Prof Delong, yes, the average jumbo mortgage is just under 7%, but a $1.5mm mortgage (or even a $1.2mm mortgage, with 20% equity) is not the average mortgage. Also, if it's true that this was a proposed no-doc, then he's essentially sub-prime. And, finally, it was a mortgage broker--they don't have their own money, so it's entirely possible that they quoted a ridiculous rate--something similar happened to a friend about 6 years ago, but on the day of closing.

2. AP--the $417k conforming limit is for the amount of the mortgage, not the value of the house. Also, the median home ASKING price in metro NYC is about $450k; Metro DC is $410k; Seattle--$407k; Chicago--$300k. Median home prices are only over $500k in California--hardly "most major American cities".

3. adc: "deduct his interest payments off his top-bracket income tax (at least a good chunk, there is some upper limit IIRC unless the Rethugs have repealed it)". The cap is $1mm for a first mortgage plus $100k for a HELOC. BUT, there is a significant phase-out for dedcutions once you pass about $250k in AGI and there is almost no doubt this IB would get hit badly by the AMT. His mortgage interest dedcution has to be discounted by at least 50%, and assuming no deduction wouldn't be crazy.