Park City bankers explain credit crunch
July 31, 2009
Ask any Realtor or home builder how they’re doing and they often say the same thing: clients can’t get "jumbo loans." Those are home loans that exceed a $729,750 limit set by Congress as the maximum amount for loans guaranteed or purchased by the federally-chartered Fannie Mae and Freddie Mac.
That’s a relatively small sum when shopping for a stand-alone house in Park City. Before last September, home-financing companies used to brag about their ability to find loans for nearly any amount.
That is because mortgages are usually sold to investors. Before the credit crisis, there were many types of investors. Now, there are few to speak of unless the loans are guaranteed by Fannie Mae and Freddie Mac which still buy the majority of mortgages in America.
But unfortunately for Park City home shoppers, the Federal Housing Finance Agency (FHFA) sets limits on the size of loans they can buy, hence the distinction "jumbo," explained Brad German, spokesperson for Freddie Mac.
The irony is it’s a great time to get a smaller loan.
"Wells Fargo has made more loans in the first six months of this year than they have in years. Money is available, plentiful and inexpensive. And it’s absolutely true," said Rick Klein, sales manager for Mountain Summit Mortgage, an affiliate of Wells Fargo.
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"Frontier remains a very active lender," said Marc Estabrook, president of Frontier Community Bank. "Year to date, we’ve funded nearly $32 million in loans."
Riley Risto, vice president and branch manager at Mountain West Bank, explained the problem this way: Commercial mortgages; jumbo mortgages; construction loans; and home equity loans or lines are much harder and more expensive to obtain; loans for residential developments; and loans for timeshares, fractional ownerships and condominiums to be used for nightly rentals, are all but impossible to get.
"Unfortunately, these segments make up a significant portion of Park City’s real estate market," he said.
Klein said borrowers for the types of loans listed above are "under much more of a magnifying glass today."
It wasn’t hard to qualify for a loan in the past, Estabrook said, and those days are gone.
Because the FHFA is backing smaller loans, investor banks are still buying them and local banks are still supplying them. But because there is no security in buying loans not approved by the FHFA, global investors aren’t interested, Klein said.
Risto said he believes a correction in the market is necessary and warranted. He said there was a false boom created by a policy of artificially-low interest rates set by the Federal Reserve. The market was alright with "toxic assets" because they moved quickly through the system to companies like Countrywide, then on to the general investing public. Now banks and secondary-market investors "are being highly scrutinized by auditors and analysts for their concentration levels and risk management."
It may seem odd that large loans going for large houses would be trusted less than average homes going to regular Americans in the midst of a recession. Common sense might suggest that someone who can afford a $1 million house is more trustworthy than a blue-collar working trying to buy a $200,000 condominium. After all, job losses are still predicted.
But Risto explained that jumbo loans were popular among real estate investors.
In the old system, a plumber could just declare his income at $1 million a year and qualify for a $1-million loan so he could flip a house. Inexperienced contractors and novice investors suddenly became residential developers during the boom and got loans to create subdivisions. After the credit crisis last September, lenders were left holding loans for over-priced homes and half-completed neighborhoods.
Klein said the result of this national trend is that if banks lend jumbo loans, they’ve got to keep them. Even if a bank can afford to do that, they’re going to price those loans at a higher rate.
Estabrook said his bank has been making those loans and has been keeping them. But a bank that size can only make so many of them.