Credit Brahmins . . and Untouchables

Better Jumbo Rates May Presage Market Improvement

Just as a watched pot supposedly never boils, my instinct is that residential real estate is not close to bottoming -- at least nationally -- so long as everyone seems focused on calling the bottom. With that caveat, however, there are some recent signs of improvement worth noting.

One of the most encouraging is a drop in jumbo rates to around 6.25% locally. That's a full point below where they had been just three months ago, and within 50 basis points of prevailing rates on "conforming" mortgages (under $417,000, for most of the country).

As market-watchers know, one of the side effects of the credit crisis has been the opening up of a huge gap between the rates on conforming and non-conforming (jumbo) loans. Only the former are insured by Freddie Mac and Fannie Mae, and in a suddenly risk-averse universe, "uninsured" meant "un-sellable." (Historically, rates on jumbo's have been slightly higher than conforming loans, to compensate lenders for the greater amount of capital at risk.)

The shrinking of the jumbo loan premium indicates that the credit markets are calming down. Cheaper money means increased buyer demand, especially in expensive coastal markets like New York and California. In turn, increased demand bodes well for housing prices.

Behind the scenes, however, it's far from business as usual.

Just as investors are busy trying to separate the healthy investment banks from the walking wounded (or worse), mortgage lenders have gotten religion about distinguishing good credit risks from bad. To qualify for today's cheaper jumbo loans, borrowers must now have high credit scores, a strong balance sheet, and good income. Needless to say, all of the foregoing must be documented.

Brahmins . . and Untouchables

Those borrowers who pass muster qualify for attractively-priced jumbo loans. If anything, they are likely to find themselves increasingly being courted with perks and discounts (think, "frequent borrower miles").

There are two reasons for this. One, there are fewer strong borrowers. In a recessionary economy where many consumers have bruised, housing-related finances, credit survivors (if not exactly thrivers) stand out. And two, more lenders are competing for their business. Thanks to aggressive Federal Reserve easing, this may be the first banking crisis in history where the banks survive and it is the customers that disappear.

Before banks can do business with these prospects, however, they must first identify them and figure out how get to them in the door (or onto the Web site). Hence, the perks.

Unfortunately, borrowers on the other side of this "bifurcated market" needn't bother to apply -- literally. Interestingly, even people who have exemplary credit repayment histories may now find themselves on the wrong side of this divide, if their absolute level of debt is relatively high. The rationale, according to one loan officer I heard recently, is that such borrowers simply have less margin for error.

In today's cautious, uncertain economy, lenders have no interest in risking their diminished capital on marginal borrowers. That's especially the case as more lenders hold onto loans they're originating (vs. re-selling and securitizing them). However, it would appear the doors are once again opening wide for the best customers.