Mortgage blow hits 'McMansion' clients

Mortgage blow hits 'McMansion' clients
By Victoria Kim
Copyright The Financial Times Limited 2007
Published: August 29 2007 03:00 | Last updated: August 29 2007 03:00


Last month, a New York hedge fund manager tried to close the deal on a $6m apartment in downtown Manhattan that he had set his eyes on a year and a half ago. Back then, the manager, recently married and looking to purchase his first home, had been approved for a mortgage at 80 per cent financing with no income verification.

Come July, however, the manager could not close the financing, says his mortgage broker Melissa Cohn, president of Manhattan Mortgage. He was left to settle instead for an apartment in the same building that was half the price, at only 76 per cent financing.

The tale is typical of thousands of US home buyers, who are stretching themselves to finance expensive homes but finding mortgages slipping through their fingers.

Jumbo mortgages are defined as those for more than $417,000, the level beyond which Fannie Mae and Freddie Mac, the government-affiliated mortgage banks, will not lend. They are particularly associated with financing for the aspiring wealthy and their suburban "McMansions" - the type of often neo-classical, new-build properties that have sprung up across the US in recent decades.

But with such a relatively low cut-off for jumbo mortgages, borrowers are often far from the wealthy professionals that one mightimagine.

Jumbo mortgage rates inched down to 7.4 per cent last week but the week before they hit a five-year high of 7.43 per cent, according to bankrate.com.

The hardest hit by the changing markets are those on the margin, straining their resources to buy a first home.

The market for jumbo mortgages has become "bifurcated", says Ms Cohn of Manhattan Mortgage.

"There are two different mortgage rules out there. For very strong qualified buyers, there are plenty of banks and plenty of great rates . . . for people applying for jumbo mortgages with some hair on their application, it's going to be more expensive."

Some poor-credit buyers face rates as high as 12 per cent, and no-income-verification and no-money-down mortgages for the underqualified are a thing of the past, says Guy Cecala, publisher of Inside Mortgage Finance, and a 27-year veteran of the industry.

And as large loans become a near impossibility for subprime or the next tier up of "Alt-A" borrowers, marginal buyers may be squeezed out of the jumbo market.

Inside Mortgage estimates that in the first half of 2007, as much as 10 per cent of jumbo mortgage loans were issued to subprime borrowers. Another 25 per cent of the market was estimated to be "Alt-A" mortgages.

Home buying at the very high end, however, remains robust as buyers expect the market to pick up.

Kathy Korte, president and chief executive of luxury real estate company Sotheby's Realty, says that although her clients are concerned, their willingness to buy has not been affected.

"The industry doesn't want to throw out the baby with the bath water. There still are a lot of highly qualified buyers," says Pamela Liebman, chief executive of Corcoran Group, which lists homes and resorts in Manhattan and the Hamptons.

Real estate agents and mortgage brokers say the very high-end of the housing market remains unaffected by the increase in rates and market trouble, because buyers are typically purchasing secondary or tertiary homes, often with cash.

Celebrities certainly do not seem hindered by market conditions - Stephen Shapiro, co-founder of West Side Estate Agency that lists celebrity homes in Beverly Hills, Bel Air and Malibu, is among the agents who say they have not lost any deals in the turmoil. David and Victoria Beckham were among the latest to splash out $20m on a luxury Beverly Hills home.