Ask half-a-dozen mortgage and real estate brokers which bank has the best rates for residential mortgages in New York City right now, and expect two dozen different answers.
Then check back again, in a week or even a day, for an entirely new set of replies.
Buyers have typically benefited from shopping around for mortgage rates from various lenders. However, in the wake of a massive government bailout of ailing banks plus a recessionary deep freeze in the credit markets, the residential mortgage market is more splintered than it has been in 15 years. What’s more, it’s only growing more fractured.
“It used to be three or four banks would control 80 percent of the market, but now it’s 12 banks, and those constantly change,” said Eric Appelbaum, president of Apple Mortgage Corp. in Manhattan. “Rates are between 4 7/8 and 5 3/8 right this second, and two months ago they were cheaper.”
Look beyond the waves of volatility, and a few clear trends emerge.
Wells Fargo and Bank of America are continuing their march into New York, offering highly competitive terms on 30-year fixed-rate “conforming” loans that meet Fannie Mae and Freddie Mac guidelines — at press time, as low as 4 7/8 for mortgagees with good credit and good income.
Former President Bush’s Economic Stimulus Act raised the amount of loans guaranteed by Fannie and Freddie to $729,750 in high-cost areas, but for loans above that amount — also known as “non-conforming” or “jumbo” loans — smaller players such as Astoria Federal Savings remain the go-to source for highly competitive rates, despite the billions of dollars in bailout money bestowed on big banks to get them lending again.
In addition, since interest rates began rising in April, five- and seven-year adjustable-rate mortgages, or ARMs, are regaining popularity — despite the dangers of unaffordably higher payments that can tip weak borrowers into foreclosure when the ARMs reset.
In fact, the market has not yet ridden out the effects of the option ARM boom from 2004 to 2008, when over $750 billion of option ARMs were originated in the U.S. Indeed, Bloomberg News recently reported on a huge spike to 42 percent of such loans originated in 2006 becoming 60-plus days late. In 2007, 35 percent of the loans were late.
Despite the risks, some borrowers are still willing to take out these loans to avoid the higher initial rates of fixed mortgages.
“When the 30-year fixed was at 4.5 percent, people didn’t really want to talk about ARMs,” said Rose Schwartz, senior loan officer at Everest Equity Company. “As soon as the fixed rates hit 5 or 5.25 percent and we can talk about 4.5 or 3 percent for an ARM, it becomes more popular.”
Trends in New York City are unfolding in the context of what has essentially been a government takeover of mortgage lending nationwide for loans under $417,000, the single-family home conforming loan limit applicable to most of the country. That has helped ease the lending freeze in markets outside New York, but the city’s costly real estate — even post-bubble, the average Manhattan apartment still fetches over $1 million — relies more heavily on jumbo loans.
The action for jumbos has been in ARMs, with specialties emerging among portfolio lenders —institutions that originate and fund loans for their portfolios rather than resale to the secondary market and are not bound by Freddie Mac and Fannie Mae guidelines — who offer these loans.
For example, Maspeth Federal Savings & Loan is known for offering more attractive fixed rates, while Flushing Savings Bank is known for good deals on ARMs. According to several brokers, Astoria Federal Savings has some of the best deals for ARMs, and the most stringent requirements for credit and income. The bank has been offering both the best rates — as low as 4.5 percent — and fastest turn-times — as little as a week for approval — on ARMs, said Julie Teitel, senior vice president of GuardHill Financial Corp., a Manhattan-based mortgage banker and brokerage company, which works with the lender. “Brokers are finding little niches with specific lenders,” said Schwartz. “Not every loan that will fit Flushing will fit Maspeth.”
As jumbos go, so goes the New York mortgage market, said brokers.
In general, rates on 30-year fixed jumbos have been so high that mortgagees have opted for ARMs instead.
“ARMs have been the only game in town for jumbos,” said Richard Bouchner, managing director at Commodore Property Group. “Thirty-year fixed jumbo rates have stayed ridiculously high, with banks pricing them to the point where they are basically saying, ‘If you are stupid enough to take out a loan at 8.5 percent, you’ve got to be pretty desperate.'”
The big banks, such as JPMorgan Chase, have offered these jumbos through their own lenders at up to 8 percent, a low percentage by historical standards, but high compared to the rates banks provide customers for deposits. With banks paying out 1.5 percent but charging 7.5 percent, the profit before expenses is 6 percent — an unprecedented spread, noted Guy Cecala, publisher of Inside Mortgage Finance Publications.
“It’s very hard to explain that to a savvy New York customer who understands the correlation between an ARM and LIBOR [London Interbank Offered Rate] or the 10-year Treasury bill rate and mortgage rates,” said Bouchner. “They say, ‘The banks are getting all this TARP money and are happy to take my deposits and give me a low yield, but now, when I need them, they are increasing their spreads?'”
This summer Chase is launching a pilot program to do jumbos with correspondent lenders for borrowers who have a Chase checking account or agree to open one, and Citi has jumped back in as well. Given the importance of jumbo loans, these moves could have far-reaching impact on both the rates and availability of these loans.
The decisions will hardly offset the plunge in new residential mortgages — which may be as steep as 50 percent this year — but signal a tiny step toward a more consumer-friendly marketplace.
“In the last month or two, most of the major banks decided they wanted to be competitive in jumbos,” said Cecala. “Certainly they are not doing anything near what they did several years ago … but anything they are doing now is a huge move.”