Above-Average Joe Can't Get a Loan

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NEW YORK (TheStreet) -- We've all seen stories about jobless borrowers struggling to make ends meet, employed homeowners who are underwater on their mortgages, and small-business owners trying to stay afloat without adequate financing -- the economic downturn's impact on Average Joe.

What we've heard less about is Above-Average Joe's difficulties in getting a loan at a reasonable rate, if he can get a loan at all.

The federal government has thrown a whole lot of money at the housing and lending markets, both directly and indirectly. But those funds have been aimed squarely at low-income borrowers or mom-and-pop shops trying to get a foothold in the new economic climate.

On the housing front, there's the $75 billion mortgage-workout program for troubled homeowners, combined with support from the Federal Housing Administration, which guarantees certain types of loans to less-privileged borrowers. Those loans are, in turn, bought by Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE), which is really the only reason why banks like Bank of America (Stock Quote: BAC), Citigroup (Stock Quote: C), and JPMorgan Chase (Stock Quote: JPM) have been making them at all.

On the commercial front, Congress has granted the Small Business Administration repeated requests for more funds to guarantee small- and medium-sized business loans. The agency has loosened its standards to qualify more desperate borrowers. Over the past 15 months, the SBA has extended nearly $1 billion worth of guarantees to support roughly $25 billion worth of new commercial loans.

Broadly speaking, there's also the Federal Reserve's policy of lending money to banks for nearly nothing and funneling roughly $2 trillion into the debt markets -- all of which has kept rates at historically low levels.

But the policies and programs have especially benefited so-called "conforming" borrowers who are eligible for federal programs. Likewise, it has put nonconforming borrowers who have better credit metrics at a disadvantage.

"You know who's paying the most for their credit today? Who's getting punished? The good businesses," says Barry Sloane, CEO of Newtek Business Services, which lends to small- and medium-sized businesses across the U.S. "If you were a good business who played by the rules, you're the one getting punished. The deadbeats are getting a pass."

For instance, while the SBA has opened the spigots for struggling small businesses, the overall commercial-loan market has shrunk 18% over the past year, according to Fed data. It's down nearly 25% since its peak in October 2008.

Meanwhile, the market for jumbo mortgages, which barely existed in recent years, has finally started to gain some traction. But borrowers are still finding rate quotes to be burdensome, compared with their less-wealthy peers.

The average 30-year fixed mortgage purchased by Freddie Mac now runs below 5%. Nonconforming jumbo loans range from a quarter-point to an entire point above that level. Sloane points out that jumbo-loan underwriters are slapping borrowers with much tougher standards and higher down payments.

"In order to get that kind of a loan from a bank, you have to have virtually no leverage, a lot of hard assets, and good cash flow," he says, harkening back to the "Five C's" of credit that underwriters learn in Mortgage 101.

On Thursday morning, Wells Fargo (Stock Quote: WFC) Home Mortgage's Web site cited pricing for a conventional, 30-year fixed mortgage at 4.875%. A nonconforming jumbo loan would be priced at 5.5% -- a "discounted" rate for borrowers who not only qualify, but also have a depositary account with Wells, that they'd need to authorize for automatic mortgage payments.

Given those hurdles, let's say a Wells Fargo depositor agreed to those terms, and wanted to get a jumbo loan for $2 million with a 20% down payment. And let's say she was qualified and accepted the quoted 5.5% rate, factoring 0.5% insurance and 1.25% property taxes. Using a standard mortgage calculator, she'd have to pay roughly $617 more per month -- or $222,225 more over the life of the loan -- than she would with the rate a conforming borrower would get. That's despite what is likely to be a higher down payment, greater income, more collateral and better credit history.

The reason those loans are more expensive is because they're riskier in certain ways, even though the borrower herself is not. Jumbos are bigger, not government-guaranteed, and don't have a virile secondary market in which banks can package and resell the loans to private investors. Therefore, the bank would have to hold the loan on its books -- something few are eager to do in the current interest-rate and balance-sheet environment.

"They have little space to put on new loans, and they're trying to put it on as profitably as possible," says Dennis Nason, a former Wells Fargo banker who now runs an executive-search firm. "It's an opportunity for banks to create and sell, rather than to create and hold."

In a sense, getting qualified for a jumbo mortgage or non-SBA-backed commercial loan is a privilege these days, even for the privileged.

At least one banker who works with the wealthy set at a large lender says the disparity has confounded his clients. Some have been refused financing because they make too much money to qualify for conforming loans; others have been rejected because their income streams -- while significant -- are based largely on interest earned from trusts, rather than steady 9-to-5 jobs; still others have been rejected because their income wavered during the crisis, even though they have ample reserves of cash in the bank.

"I have to tell a guy with $30 million in the bank that I can't qualify him for a $500,000 loan," says the banker, who was not authorized to speak on the record.

The select few who have been approved for jumbo mortgages or non-SBA-backed commercial loans were aghast at quoted rates, according to the banker, and largely turned the offers down.

But Leif Thomsen, CEO of Mortgage Master, doesn't have much sympathy and characterizes such complaints as sour grapes.

Thomsen's firm deals mostly with upper-middle class and wealthy homebuyers in the Northeast. He notes that credit availability for affluent borrowers has improved dramatically since the financial crisis first erupted. He also points out that jumbo rates have always been higher than conforming rates, with the spread recently narrowing back to historical norms.

The main difference today, according to Thomsen, is that jumbo borrowers are "required to put a little bit more money down" than they did at the height of the housing bubble, "when money was flowing a little bit too freely."

"As we all know, you can still get an FHA loan for 3% down," he said, "and I think we all agree that shouldn't be the case for a multimillion-dollar home."

On the rate front, a recent announcement by Redwood Trust provided a glimmer of hope.

Redwood announced on Monday the successful securitization of $238 million in top-grade jumbo residential mortgages -- without government support. The deal was the first of its kind since the middle of 2008. If others in the private market follow suit, and provide secondary support, jumbo borrowers may see rates ease even more.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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