A fading middle-class perk: lower mortgage rates
Bankers now view jumbo borrowers as safer and shrewder bets even though conventional borrowers put less capital at risk.
The Associated Press
WASHINGTON — For three decades, the U.S. middle class enjoyed a rare financial advantage over the wealthy: lower mortgage rates.
Now, even that perk is fading away.
Most ordinary homebuyers are paying the same or higher rates than the fortunate few who can afford much more.
Rates for a conventional 30-year fixed mortgage are averaging 4.48 percent, according to Bankrate. For “jumbo” mortgages — those above $417,000 in much of the country — the average is 4.47 percent.
This trend reflects the widening wealth gap between the richest Americans and everyone else. Bankers now view jumbo borrowers as safer and shrewder 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 surged 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.
Previously, 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 percent, a jumbo 5.97 percent. The advantage for middle-class borrowers was possible in part because government-chartered firms guarantee that lenders will be paid on a conventional mortgage even if a borrower defaults. No such guarantee exists for jumbos.
“Jumbo borrowers represent the holy grail of what financial institutions are pursuing: that much-desired, mass affluent consumer,” said Greg McBride, a senior analyst at Bankrate.
In the first three months of 2014, 37 percent of the money Bank of America lent for mortgages went to jumbos, compared with 22 percent at the same point last year.
“We’re lending where we believe homeownership is sustainable,” said Matt Vernon, who leads consumer-mortgage lending at Bank of America.
Sales of homes exceeding $1 million leapt 7.8 percent over the past 12 months. That contrasted with a 7.5 percent drop in overall homebuying in that period, according to the National Association of Realtors.
The trend coincides with the lopsided nature of the U.S. economy’s nearly 5-year-old recovery. Almost all the U.S. income gains from 2009 to 2012 flowed to the top 1 percent of earners, according to tax data analyzed by economist Emmanuel Saez at the University of California, Berkeley.
By contrast, median household income was $51,017 in 2012, $4,600 below its peak in 2007, according to the Census Bureau. Squeezed by scant pay raises, the middle class has struggled or hesitated to take on mortgage debt.
Nearly 1 in 5 homeowners still owes more on their mortgage than their homes are worth. Without home equity, they have little or no wealth even as richer 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 bust 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 boosted conventional-mortgage rates and likely blunted the effectiveness of the Federal Reserve’s efforts to keep rates low to invigorate 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.