Low-Risk Borrowers Now Feel Crunch

The Washington Post reports:

Nicholas Schor and Liza Losada-Schor were ready and willing to spend up to $850,000 on a house in Maryland. That was a month ago, when the rate on their mortgage would have been as low as 6.25 percent.

But a sudden shift in the mortgage market means that the couple -- he's a psychiatrist, she's a clinical nurse psychotherapist -- now face a rate of more than 7 percent, reducing their buying power even though they have solid credit. That's because in the past few days, rates on loans for more than $417,000, known as jumbo loans, have shot up.

"I'm sort of surprised that even though we have excellent credit and excellent income and are putting down a 20 percent contribution that the banks aren't able to offer better rates for folks who seem to be a more reliable investment," Schor said.

Up until now, the turmoil in the mortgage market has mostly affected subprime borrowers, or those with spotty credit. However, as credit worries have spread, the gap has widened between "conforming" loans, which are eligible for purchase or guarantee by Fannie Mae and Freddie Mac, and jumbo loans, which aren't.

As of yesterday, lenders were charging an average of 7.34 percent for prime, 30-year, fixed-rate jumbo loans, according to financial publisher HSH Associates. That was up from an average of 7.09 percent last week.

It was also 0.75 percentage points more than the 6.59 percent they were charging for conforming loans. In mid-July, the difference between the two types of loans was 0.20 percentage points .

"A sizable disparity in prices has shown up in the last couple of days," said Keith Gumbinger, vice president of HSH.

The leap in rates comes even as 10-year Treasury bond yields have been falling. Typically, mortgage rates follow the Treasury.

The spread between mortgages and treasuries isn't fixed.You can bet on that.