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A fading middle-class perk: lower mortgage rates

Imran and Aniqa Jaswal, with daughters Jayda and Arissa, bought their first house in La Jolla, Calif., where, they say, you can’t find a house below jumbo mortgage prices.
Imran and Aniqa Jaswal, with daughters Jayda and Arissa, bought their first house in La Jolla, Calif., where, they say, you can’t find a house below jumbo mortgage prices.Lenny Ignelzi/Associated Press

WASHINGTON — For three decades, the American middle class enjoyed a rare financial advantage over the wealthy: lower mortgage rates.

Now, even that perk is fading away.

Most ordinary home buyers are paying the same or higher rates than the fortunate few who can afford much more.

Rates for a conventional 30-year fixed mortgage are averaging 4.48 percent, according to Bankrate. For ‘‘jumbo’’ mortgages, those above $417,000 in much of the country, the average is 4.47 percent.

This trend reflects the widening wealth gap between the richest Americans and everyone else. Bankers now view jumbo borrowers as safer and shrewder bets even though conventional borrowers put less capital at risk.


Even as the overall housing recovery has slowed, sales of homes above $1 million have surged in the past year. Price gains have been so great in some areas that middle-class buyers are straining to afford even modest homes. They are also facing tighter lending rules, larger down payment requirements, and a shortage of houses for sale.

It used to be that rates for conventional mortgages would be 0.2 to 0.3 of a point below rates on jumbo mortgages. A decade ago, a conventional rate averaged 5.68 percent, a jumbo 5.97 percent. The advantage for middle-class borrowers was possible in part because government-chartered firms guarantee that lenders will be paid on a conventional mortgage even if a borrower defaults. No such guarantee exists for jumbos.

Two factors have caused the spread between conventional and jumbo rates to vanish:

■  The government in 2012 began raising the fees it charges lenders for guaranteeing payments on conventional mortgages. Lenders passed along that increase to borrowers in the form of higher rates. The fees are meant to stop home buyers from once again borrowing more than they can afford, a trend that fueled the 2007 housing bust.


■  Bankers say they have begun using mortgage rates to woo high net worth clients: Attractive rates on jumbos have become a way to secure additional business from those clients, from managing their investments to supplying a broad suite of financial services. Also, those borrowers tend to be clustered in neighborhoods that lenders consider more stable.

‘‘Jumbo borrowers represent the holy grail of what financial institutions are pursuing: that much-desired, mass affluent consumer,’’ said Greg McBride, a senior analyst at Bankrate.

In the first three months of 2014, 37 percent of the money Bank of America lent for mortgages went to jumbos, compared with 22 percent at the same point last year.

The lower rates are geared for affluent borrowers living in ‘‘sweet spots’’ with strong employment and stable home prices — areas like metro New York City, Boston, and sections of California, said Matt Vernon, who leads consumer mortgage lending at Bank of America.

‘‘We’re lending where we believe home ownership is sustainable,’’ Vernon said.

Wells Fargo offers jumbos starting at 4.25 percent, about 0.25 point lower than for conventional mortgages. This month, Wells trumpeted the spillover benefits of increased jumbo lending: A 14 percent year-over-year increase in loans from its separate ‘‘wealth, brokerage, and retirement’’ division.

Sales of homes exceeding $1 million leapt 7.8 percent over the past 12 months. That contrasted with a 7.5 percent drop in overall home-buying in that period, according to the National Association of Realtors.

Prices have appreciated in areas such as San Francisco, New York, and Washington, which have higher thresholds for jumbo mortgages than the national average. Jumbos in these cities are for loans above $625,500, about $200,000 more than the national average.


Jumbos are a necessity for nearly everyone in communities such as La Jolla, Calif. That is where in February, Aniqa Jaswal and her husband, Imran, bought a four-bedroom house near the beach.

‘‘There are no homes below jumbo mortgage prices here,’’ Jaswal said.

Not even jumbo borrowers feel completely safe. Some are borrowing in anticipation of setbacks in an economy where bills can multiply even when incomes barely budge.

One is Stephanie Kellen, who in December refinanced her home in Marin County, Calif., with a jumbo. The lower-than-usual jumbo rate helped replace a line of credit for her husband’s auto repair business.