Friday, August 10, 2007

That's Why They Call It a "Crunch"

by Tanta on 8/10/2007 07:48:00 AM

The Washington Post reports this morning on the heart-rending situation of upper-middle-class borrowers who are facing the dire situation of being offered a jumbo mortgage interest rate of "more than 7 percent":

Nicholas Schor and Liza Losada-Schor were ready and willing to spend up to $850,000 on a house in Maryland. That was a month ago, when the rate on their mortgage would have been as low as 6.25 percent.

But a sudden shift in the mortgage market means that the couple -- he's a psychiatrist, she's a clinical nurse psychotherapist -- now face a rate of more than 7 percent, reducing their buying power even though they have solid credit. That's because in the past few days, rates on loans for more than $417,000, known as jumbo loans, have shot up.

"I'm sort of surprised that even though we have excellent credit and excellent income and are putting down a 20 percent contribution that the banks aren't able to offer better rates for folks who seem to be a more reliable investment," Schor said.
This is "price rationing," the evil twin of "nonprice rationing," the two components of a thorough-going credit crunch. The Schors may be surprised to discover that the same mechanisms that allowed ample credit to high-risk borrowers also kept the cost of credit to low-risk borrowers artificially low, but those of us in the financial industry do not speak of credit crunches in tones of horror because they are simple predicable, controllable "corrections" that merely tidy up a few regrettable underwriting guidelines and leave the traditionally-creditworthy unscathed.

Of course, it could have something to do with that $850,000 house:
"With a rate increase from 6.75 percent to 7.5 percent, the buyer's buying power just dropped by 10 percent," said Frank Borges LLosa, a broker at FranklyRealty.com. "That $600,000 buyer will now have to look at buying a $550,000 place or paying 10 percent more per month for the same house versus last week."

That's what happened with the Schors. They recently bid $675,000 for a six-bedroom house in Olney, instead of the higher amount they originally thought they would spend. They are still hoping they can find a mortgage lender that will offer a better rate.
It is possible, however, that the lender will be just as spooked by the appraisal of the $675,000 house as the $850,000 house. There's a lot of price froth yet to evaporate in Olney, Maryland.

I don't particularly want to pick on the Schors--I'm sure they're nice people and decent credit risks--but theirs is the story I think of frequently when I hear clamoring to raise the conforming loan limit. I don't hear too many folks asking how Fannie and Freddie can afford to shave 100 bps off the Schors' interest rate when the private jumbo market cannot.