Bad news for jumbo mortgage loans
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Strategies for home buyers
There are some workarounds. Making a down payment of at least 20 percent helps. So does documenting one's income, although that forces borrowers to tell the truth about how much they make -- which limits the amount that they may borrow. Another strategy is to get a piggyback loan: Instead of borrowing $500,000, a home buyer can get a first mortgage for $417,000 and a fixed-rate home equity loan for $83,000. Not every lender might go for a loan structured like that, though.

Another tactic is to shop for a less expensive house. Pat Lashinsky, CEO of ZipRealty, believes this already is happening. It can happen like this: A family that planned to buy a $600,000 house with a $120,000 down payment would have to get a jumbo mortgage of $480,000; that family might decide to buy a $500,000 house instead, so they could get a conforming loan at a lower rate.

Effect of falling demand
Falling demand for expensive houses could lead values to fall. Rising rates eventually could lead to more foreclosures, which would add to the supply of similar-priced houses, sending their values lower, creating a vicious circle of falling prices and rising foreclosures.

"I'm a little concerned about that as well," says Larry Goldstone, CEO of Thornburg Mortgage, a Santa Fe-based lender that specializes in ARMs, usually for jumbo customers. "Credit is tightening very quickly."

Goldstone is waiting to see if there's solid evidence that demand for expensive houses is dropping. In the absence of such evidence, he thinks the rhetoric is getting overheated. When he hears words like "debacle" and "correction" used to describe mortgage and housing markets, he says: "I don't know that those words are real good descriptors."

Investors who buy mortgages are nervous, and they need some confidence, he says, and the Federal Reserve could help by acknowledging the problem.

Tom Davie, owner of Davie Mortgage Group in Palm Bay, Fla., says the housing market isn't collapsing. It just seems that way because some markets boomed so much in the past few years. "It's just going back to normal," he says. Prices would stop falling if people would stop putting their houses on the market, he says.

That's easier said than done. Everyone who tries to sell a house has a good reason to do it. Anyway, there is one group of people who might benefit if lack of availability of jumbo mortgages causes house prices to fall: First-time buyers in expensive markets, especially Southern California, where even a modest cottage pushes most borrowers into jumbo territory.