Tight Credit Squeezes Jumbo Mortgage Market

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A "For Sale" sign is displayed in front of a home in Miami, Fla. i

A "For Sale" sign is displayed in front of a home in Miami, Fla. Joe Raedle/Getty Images hide caption

itoggle caption Joe Raedle/Getty Images
A "For Sale" sign is displayed in front of a home in Miami, Fla.

A "For Sale" sign is displayed in front of a home in Miami, Fla.

Joe Raedle/Getty Images

Troubles in the mortgage market are beginning to have an impact on more expensive properties.

Lenders are demanding a bigger premium for so-called "jumbo" home loans.

A "jumbo" mortgage is one that is bigger than $417,000, which is the maximum that can be guaranteed by the government-backed agencies Fannie Mae and Freddie Mac.

Because of this, jumbo loans typically carry a slightly higher interest rate than smaller loans. But this month, the gap widened to nearly a full percentage point.

The average rate on a 30-year jumbo loan is now well over 7 percent, with some banks charging as much as 10 percent. Greg McBride, of Bankrate.com, says even though jumbo loans have not been plagued by a rash of defaults like subprime mortgages, the investors who bankroll the loans are still nervous.

"Investors ultimately drive the bus in terms of what credit is available in the mortgage market and at what price," McBride says.

The higher interest rate adds hundreds of dollars a month to the cost of a jumbo loan. That is a challenge in areas of the country where even a modest house can cost more than $417,000.

"Places like California, much of Florida, the northeast, Washington, D.C. are higher-cost housing markets where more borrowers take jumbo-sized loans because the price of homes is so much higher," he says.

Some policy makers want to allow Fannie Mae and Freddie Mac to guarantee those larger loans to give borrowers a break. The government agencies already back larger loans in Alaska, Hawaii, and Guam.

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