Bad news for jumbo mortgage loans
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"I've never seen anything like this in my life," says Bob Moulton, president of Americana Mortgage Group of Manhasset, N.Y. "The last couple of days last week, it was difficult to place loans."

Moulton quoted one client a 7 percent rate on a stated-income, jumbo mortgage. That was on a Monday. By Thursday, the rate had jumped to 13 percent and the client was considering an option ARM, which would allow him to pay interest only or even less than the interest accumulated over the month. It's either that or lose a $120,000 deposit.

How did this happen?
To understand why jumbo and Alt-A rates climbed so fast, you have to know a little bit about how the secondary mortgage market works.

Many mortgages are sold to investment banks, which bundle them into pools of thousands of home loans. Investors buy bonds that entitle them to a share of the principal and interest that homeowners pay every month. The prices and yields of these bonds can vary.

Bond prices and yields vary depending on:

• The average interest rate of the loans in the pool. • The odds of the loans being paid off early (high-interest loans are likely to be refinanced more quickly, removing those loans from the pool). • The credit risk involved. Certain borrowers impart more risk to the bond holders who own a share of their loan payments. Among those risky borrowers: people with flawed credit, homeowners who are up to their eyeballs in debt and applicants who don't document their incomes.

The jumbo loan market has frozen up because of uncertainty regarding that third bullet point. When jumbo mortgages are securitized, the loan pools contain a mixture of mortgages in which borrowers documented their incomes along with mortgages in which borrowers merely stated their incomes, without providing documentation. In other words, they mingle jumbo and Alt-A.

Many -- probably a majority -- of stated-income borrowers exaggerated their earnings so they could qualify for a loan. As a consequence, a lot of them got mortgages that they couldn't afford in the long run. Investors now believe that stated-income borrowers are going to default on their jumbo loans in bigger than previously expected numbers. So they have virtually stopped buying Alt-A and especially jumbo Alt-A mortgages. When lenders can't sell the loans, they stop offering them to borrowers -- or they ration them by jacking up the rates. That's what happened.

Who wins, who loses?

Who wins: People who buy homes months or years from now, as house values decline. Who loses: People who want to borrow more than $417,000, or who don't want to document their income. Sellers of expensive houses, especially in pricey markets such as Southern California.