For three decades, the U.S. middle class has been given a rare financial advantage over the wealthy, lower mortgage rates. Now, even that one advantage is going away. Most homebuyers are paying the same or higher rates than the lucky few who can afford much more. Rates for a conventional 30-year fixed mortgage are averaging 4.48%, according to Bankrate. For "jumbo" mortgages , which are those above $417,000 in much of the country — the average is 4.47%.
This trend reveals the widening wealth gap between the richest Americans and everyone else. Bankers now see jumbo mortgage borrowers as safer bets even though conventional borrowers put less capital at risk. Even as the overall U.S. housing recovery has slowed, sales of homes above $1 million have risen in the past year. Price gains have been so great in some areas that middle-class buyers are straining to afford even modest homes. They're also facing tighter lending rules, larger down-payment requirements and a shortage of houses for sale.
It used to be that rates for conventional mortgages would be 0.2 to 0.3 of a point below rates on jumbo mortgages. A decade ago, a conventional rate averaged 5.68%, a jumbo 5.97%. The advantage for middle-class borrowers was possible mainly because government-chartered firms guarantee that lenders will be paid on a conventional mortgage even if a borrower defaults. This guarantee does not exist for jumbo mortgages.
Two reasons have caused the spread between conventional and jumbo mortgage rates to go away:
1. The government in 2012 began raising the fees that it charges lenders for guaranteeing payments on conventional mortgages. Lenders then passed along that increase to borrowers in the form of higher interest rates. The fees are meant to stop home buyers from borrowing more than they can afford — a trend that fueled the 2007 housing bust.
2. Bankers say they have started using mortgage rates to gain high-net-worth clients: Attractive rates on jumbos have become a way to secure additional business from those clients and from managing their investments to supplying a wide array of financial services. What's more, those borrowers tend to be clustered in neighborhoods that lenders consider more stable.
"Jumbo mortgage borrowers represent the highest goal of what financial institutions are going after: that much-desired, mass affluent consumer," said Greg McBride, a senior analyst at Bankrate. In the first three months of 2014, 37% of the money Bank of America lent for mortgages went to jumbo mortgages, compared with 22% at the same point last year.
The lower rates are constructed for elite borrowers living in "sweet spots" with strong employment and stable home prices — areas like metro New York City, Boston and sections of California, said Matt Vernon, who leads consumer mortgage lending at Bank of America. "We're lending where we believe home ownership is sustainable," Vernon said.
Wells Fargo offers jumbo mortgages starting at 4.25% about 0.25 points lower than conventional mortgages. This month, Wells celebrated the spillover benefits of increased jumbo lending: A 14% increase in loans from its "wealth, brokerage and retirement" division. "Hopefully, it'll continue to go up," Wells' CFO, Timothy Sloan, said of prospects for continued jumbo mortgage lending.
Sales of homes exceeding $1 million jumped 7.8% over the past 12 months. That differed from a 7.5% drop in overall home-buying in that time period, according to the National Association of Realtors. Prices have appreciated in areas such as San Francisco, New York and Washington, which have higher thresholds for jumbo mortgages than the national average. Jumbo mortgages in these cities are for loans above $625,500 are about $200,000 more than the national average. The average price of a two-bedroom home in San Francisco is $1.02 million, according to the real estate site Trulia. The average for New York City homes is $1.2 million. Nationwide, just 2% of homes go after prices that large.
This trend is not consistent with the downfall of the U.S. economy's nearly 5-year-old recovery. Almost all the U.S. incomes gains from 2009 to 2012 went to the top 1%t of earners, according to tax data analyzed by economist Emmanuel Saez at the University of California, Berkeley.
The difference is that average household incomes were $51,017 in 2012, $4,600 below its peak in 2007, according to the Census Bureau. The downfall happened by scant pay raises and the middle class has struggled to take on mortgage debt. Many recall the high-risk loans that started the housing meltdown and led to the financial crisis and recession. Nearly one in five homeowners still owe more on their mortgage than their homes are worth. Without home equity, they have little or no wealth even as wealthier Americans have benefited from rising prices for stocks and upper-end real estate.
At the same time, the government has reduced its support for middle class homeownership after having rescued two companies, Fannie Mae and Freddie Mac, that enabled lower rates. The housing fallout devastated Fannie and Freddie, which guarantee conventional mortgage payments. Both were forced into federal control at taxpayer cost. To limit taxpayer exposure, Fannie's and Freddie's regulator required them to raise fees for guaranteeing mortgages. Those fee increases have then raised conventional mortgage rates and most likely debilitated the effectiveness of the Federal Reserve's efforts to keep rates low to stimulate the housing market and the economy. "We're cutting off the avenue that has the most proven success in wealth building," said David Min, a professor at the University of California, Irvine, who specializes in mortgage finance. The higher fees have left the industry concerned that more people won't be able to afford to buy, said Bob Walters, chief economist at Quicken Loans, though the fees might help protect some people from having unaffordable debt. Walters doubts that rates for traditional mortgages will ever again fall meaningfully below jumbo mortgage rates. "I don't see the days of those microscopic guarantee fees coming back," he said.
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Lang Premier Properties are Birmingham Realtors specializing in Oakland County Real Estate. Stephanie is an agent with Max Broock in Birmingham, Michigan. See what past clients have to say about Stephanie Lang. Lang Premier Properties looks out for your best interests when you purchase a new custom luxury home. We always recommend working with an experienced luxury real estate agent when buying a new luxury estate. you would like information on homes for sale, or are first time home buyer not working with a Realtor and would like to schedule a consultation with a qualified Oakland County and Macomb County Realtor, please complete the Lang Premier Properties contact form to have a real estate agent contact you