Long Island home buyers seeking conventional loans face rising interest rates and tight lending criteria, while those pursuing larger mortgages encounter lower rates and more flexible guidelines, according to real estate experts and data.
Those divergent lending standards, based on what bankers say are lower risk factors for high-end borrowers, are keeping a lid on the prices of most houses, even as luxury home values rise, real estate experts say. And that makes it harder for Long Island's economy to make a full recovery, since many homeowners feel too financially squeezed to spend much at local restaurants, retailers and other businesses.
"There's a growing disparity in the access to residential mortgage credit when you break it out by jumbo versus conforming mortgages," said Jonathan Miller, chief executive of Manhattan-based appraisal firm Miller Samuel.
"Conforming" mortgages are those banks can sell to government-backed mortgage giants Fannie Mae and Freddie Mac. In Long Island and other high-cost regions, those loans must be $625,500 or less, and borrowers must meet other financial criteria, such as debt-to-income ratios and credit scores. Jumbo loans are larger and since they are either kept on banks' books or resold to investors, lenders can offer more accommodating standards.
Jumbo loans are less expensive, too. The average interest rate for a Long Island home loan less than $250,000 was 4.27 percent in May, according to Black Knight Financial Services, a Jacksonville, Florida mortgage data provider. For loans between $250,000 and $625,500, the average interest rate was 4.21 percent. In both cases, that rate was about 0.7 percentage points higher than it was a year earlier -- translating to roughly $700 more in yearly interest costs for each $100,000 borrowed.
'Jumbo' seen as better bet
Meanwhile, for the 10 percent of Long Island home buyers seeking jumbo loans of more than $625,500, the average rate was 3.17 percent in May -- an annual rise of only 0.07 percentage point. That's a reversal of past lending practice. Before last year, jumbo rates were higher since banks viewed larger loans as a bigger risk. With such appealing prices, jumbo loans made up 10 percent of Long Island's mortgage market in May, up from 6 percent in May 2008, Black Knight reported.
When Jeremy Edelstein bought a house in Great Neck in 2011, he was careful to keep his home loan below the jumbo threshold, in order to qualify for then-lower "conforming" rates. But for the five-bedroom East Hills home his family is buying now, he said, "I found it was actually cheaper to get a jumbo loan." His mortgage, whose total balance he declined to reveal, comes with an interest rate of 3.25 percent, which becomes adjustable after 10 years, he said.
Lenders see jumbo borrowers as a safer bet, said Edelstein, 39, who works at a financial firm in Manhattan. "It's quality now, not quantity," he said.
Indeed, Long Island jumbo borrowers had an average credit score of 769, compared to 745 for borrowers of $250,000 to $625,500 and 739 for those getting loans of $250,000 or less, Black Knight reported. By contrast, in early 2008, average credit scores ranged from 707 to 747.To be sure, overall lending standards have eased gradually since 2009 and 2010, when mortgage availability "shrank drastically" in the aftermath of the housing crash, according to research published in July by Goldman Sachs.
However, those benefits are not distributed evenly. First-time home buyers and others who lack hefty savings and sterling credit often seek mortgages insured by the Federal Housing Administration. Those loans allow buyers to make a down payment of as little as 3.5 percent of the house's price.
Most borrowers now must pay an annual insurance fee of as much as 1.35 percent of the total loan value, more than twice the cost in early 2008. Plus, borrowers must continue to pay those fees for the life of the loan. Previously, the insurance requirement would be dropped once borrowers amassed enough equity in the home. What's more, borrowers must pay an upfront insurance fee of 1.75 percent, up from 1 percent in 2012.
There is little sign borrowers will see FHA lending ease soon; in fact, at least one bank is backing away. JPMorgan Chase has "lost a tremendous sum of money" in FHA loans, and its volume of such loans is "way down," chief executive Jamie Dimon said in a call with financial analysts in July.
"I don't think that things are going to get too much looser than they are now," said Steve Lefkowitz, a Hauppauge-based sales manager for Flagstar Bank. "We don't want another repeat of 2007, that's for sure."
In January the federal Consumer Financial Protection Bureau imposed new guidelines for so-called "qualified mortgages," which offer lenders protection against borrowers' lawsuits. In most cases borrowers' total debt payments -- including consumer loans -- should not exceed 43 percent of their income. Even before those standards took effect, though, many banks had already imposed stringent lending criteria.
Such standards protect homeowners from the "unsafe, predatory" loans that led to the burst of the housing bubble, said Marianne Garvin, chief executive of the Community Development Corp. of Long Island in Centereach. However, she said, combined with the higher FHA insurance costs, "it has an impact on the lower end of the market."
Meanwhile, lenders court luxury home buyers with lower down-payment requirements. Last year, Wells Fargo announced it was dropping its down-payment requirement for jumbo loans to 15 percent, from 20 percent. Hauppauge-based Teachers Federal Credit Union has increased its jumbo lending since the housing downturn, said Elizabeth Mitacchione, vice president of mortgage services. Jumbo borrowers are "financially very, very secure," and they can make sizable down payments, she said. Plus, she said, "You want them to give you the deposits, you want them to take out the car loans with you, you want to create a relationship."
The impact of those divergent borrowing costs and standards can be seen in the region's home prices.
Excluding the most expensive 10 percent of Island homes, the average price of nearly $347,000 in Nassau and Suffolk in the second quarter shows a recovery of just 6 percent from that market's recent low point in late 2011, according to an analysis by Miller Samuel. The figures do not include East End sales.
By contrast, the top 10 percent of home sales fetched an average price of nearly $1.29 million, 16 percent higher than that market's low point in spring 2010, Miller Samuel reported.
Uneven help to LI economy
The region's uneven housing recovery "doesn't help the entire Long Island economy," said Irwin Kellner, Port Washington-based chief economist for MarketWatch.com. "It will help certain areas, more wealthy enclaves. It will probably take longer to trickle down to the rest of the economy."
To be sure, some less-than-luxury buyers can make significant down payments. Stan Feldman, 74, a retired insurance broker, downsized to a two-bedroom ranch in Oakdale last month. Feldman said he and his wife put $200,000 down for the $310,000 purchase, and they sailed through the approval process for their Pentagon Federal Credit Union loan. "Even if the market fell out of bed the bank's only on the hook for a third," Feldman said.
And some seek out programs intended for low- and moderate-income buyers.
Ashley Marenda, a teacher, feared she would be shut out of the housing market when she started looking in January.
"All I knew was you have to put 20 percent down and here I am doing the math in my head with these home values and these prices, and I was thinking, oh my gosh, there's no way I would ever have 20 percent," the 27-year-old recalled.
She saw a three-bedroom Victorian with a wraparound porch in the village of Patchogue, and fell in love. Marenda first looked into an FHA loan. "I crunched the numbers and over the life of loan, $100,000 is what I would have paid" in insurance costs alone, she said.
Then she learned of a program that allows borrowers to put down as little as 3 percent without paying for private mortgage insurance. TD Bank elects not to charge insurance for the loans, which it keeps on its own books, a bank spokeswoman said. The program is available to low- and moderate-income borrowers, or those buying in low- or moderate-income areas. Marenda put down 5 percent of the home's $265,000 price in July. She said her mortgage payments are "precisely $4 more" a month than the $1,800 in rent she had been paying in the village of Babylon. "It's amazing," she said. "I honestly wish other banks would do this."
In fact, certain lenders do offer assistance to lower-income borrowers; Citibank and People's United Bank are working with the Community Development Corp. to offer a second mortgage that helps borrowers avoid mortgage insurance, and some lenders offer grants to help with closing costs, Garvin said. Such programs help banks earn credits under the Community Reinvestment Act, which requires lenders to meet the credit needs of their low- and moderate-income customers, Garvin said.
Even so, she said, "Are there enough grants, like these specialized down payment assistance grants? No, those are limited."