First Jumbo Loans, Now Interest Only Gets Whacked

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First Wells took Jumbo loans from 6.875% to 8% now they’re moving hard to reprice interest only loans. The non-traditional loans are going the way of the dodo (or should I say mortgage broker). Traditionally interest only loans were a relatively painless adjustment of half a point to price off of fully amortized payments. For example if fully amortized mortgage rates are priced at 100 then interest only prices were 99.5 for the same rate.

Tomorrow morning Wells will revise guidelines from .5 point hit for interest only to 1.25 cost for interest only.

This represents a massive reprice of interest only and makes most interest only products prohibitively expensive.

As an example a $200,000 loan amount interest only at 6.625% is $1,105 compared to $1,248.40 on a 6.375% fully amortized loan (principal & interest) which is a savings of $143 per month.

Compare that with the new pricing from Wells where the same interest only loan as above would be closer to 6.75% to 6.875%. Now the interest only payment is $1,125 to $1,145 which is a savings of only $103 (at the high end) each month. That is a significant increase to the cost of borrowing on an interest only loan.

This just demonstrates again that a .25% cut to the Fed Funds Rate will not solve the liquidity problems in the secondary market. This is a repricing of risk. Riskier loans are being priced according to market appetite and a small rate cut isn’t going to make these investors more adventuresome. These loans will continue to get more expensive as money dries up and investors can demand a premium on risk.

For Brokers: You have until midnight tonight to lock in under existing price guidelines.