In this topsy-turvy lending environment, Wall Street is suddenly lumping purchasers of expensive homes together with low-income, shaky-credit homebuyers as risks to avoid.
Fannie Mae and Freddie Mac, the large government-backed companies that purchase mortgages, don't buy so-called "jumbo" loans above $417,000. That wasn't a problem in the past, but now investors spooked by turmoil in the lending industry have decided that they don't want to buy jumbo loans either.
The result? Just ask Barry R. Glazer. The Baltimore real estate broker has the income and credit history to qualify for a $1.4 million mortgage, and he expected an interest rate in the 6 percent range. The quote he got last week: 7.75 percent. If he had locked in at the beginning of last month, his payments would be about $800 a month less.
"I was shocked," he said.
Normally, jumbo loans are considered a pretty good bet - a bit riskier than "conforming" loans, which meet Freddie and Fannie standards, but not by much. The average rate in early July was about 6.9 percent for a 30-year fixed-rate jumbo loan, less than a quarter of a percentage point higher than a conforming mortgage, according to financial publisher HSH Associates.
But last week, the average jumbo rate was hovering near 7.5 percent even though rates for conforming loans had dropped slightly, to just under 6.7 percent. A gap of three-quarters of a percentage point between the two rates is very unusual.
"This is what we call a `fear and loathing' issue," said Paul Havemann, vice president with HSH Associates. Among the investors who make money available to lenders by purchasing mortgages, "trust is evaporating and suspicion is running rampant."
"The subprime taint has now extended to the jumbo market," he said.
Wall Street's about-face matters in a market where expensive homes are a fair chunk of sales. Nearly half the homes sold last month in Howard County, for instance, cost more than $417,000.
The Mortgage Bankers Association says about 11 percent of loan applications in Maryland are for jumbo mortgages. Only seven states and the District of Columbia have higher shares.
The recent rise in jumbo interest rates isn't the only problem for consumers: Those rates are also all over the board. Lenders that rely on Wall Street for their money are offering rates at 8 percent or even higher, while some firms with their own cash on hand have rates at or below 7 percent, mortgage brokers say.
Scott Phillips, president of Clarksville Mortgage Corp., a broker in Howard County, hasn't seen anything like this in 16 years in the business.
"Right now, people just need to shop very hard," he said. "You've got to find it, and it's not easy to find. ... Usually all the banks would be right in there, pretty similar to one another."
Sara Lenes, owner and president of Mortgage Associates Inc., a Columbia mortgage broker, said the lowest rate she could find yesterday for a fixed-rate jumbo loan with no points was just under 6.9 percent. Most jumbo loans she is seeing are around 8 percent, including big-name lenders that borrowers might turn to first.
An 8 percent rate on a $500,000 loan is nearly $3,700 a month in payments - about $380 more than a 6.9 percent rate. Lenes said a homebuyer who just settled on a jumbo loan with his builder's mortgage company, which charged him about 8 percent, is asking her to help him refinance.
Baltimore County Savings Bank said yesterday that its jumbo rate is 6.75 percent, plus one point - meaning origination costs adding up to 1 percent of the loan. Joseph J. Bouffard, the bank's president and chief executive, said it can offer that rate because it doesn't need to sell its mortgages in the secondary market.
"From our standpoint, these are good loans," he said. "There's nothing wrong with them if they're done properly; these are qualified borrowers."
A variety of real estate agents who work in the region's pricey markets say buyers aren't feeling much of an impact - other than surprise. Several hundred dollars extra in monthly payments would be a lot worse for a person stretching to afford a $250,000 home than a buyer settling on a million-dollar house.
"Many upper-end buyers will pay the bulk of their purchase price in cash ... under any circumstances," said Karen Hubble Bisbee, an agent for 30 years who is an associate broker with Coldwell Banker Residential Brokerage in Lutherville.
But the rate increase doesn't seem like peanuts to everyone.
"There was a contract I was negotiating, and the buyer got scared and walked away," said Ilene Kessler, president of the Maryland Association of Realtors, who was serving as seller's agent on the Baltimore County house priced at more than $1 million.
"They were stretching it to buy," she said. With the increased interest rate, "they were just really terrified."