"We’ve never sold to Fannie and Freddie," Erwin said. "We have appraisers we’ve used for year that know us. We tell them we want the fair value — what it’s worth today — and don’t put any pressure on them."
One thing Erwin does expect from appraisers is current comps, or comparable properties. If a comp is four months old, appraisers must take that into consideration.
"For awhile, they weren’t doing that," he said. "I had to go out and make them."
KeyPoint loans primarily to members, but also works with mortgage brokers like Bartlett.
"If they shop around, we will get them a good rate or send them where they need to go to. That’s the nice thing about competition," Erwin said.
Erwin said most of the jumbo borrowers coming to KeyPoint are choosing 5/1 hybrid adjustable-rate mortgages, which carry a fixed rate for five years before converting to a loan with a rate that adjusts annually. The rate is tied to performance of an index such as the London Interbank Offered Rate (LIBOR) or one-year Treasury bills.
With short-term rates near historic lows, "people tied to LIBOR or one-year Treasurys right now, they are happy campers," Erwin said.
Hybrid ARMs offer a lower rate now — based on the variable index being used plus an additional margin — with the risk of higher payments in the future. KeyPoint was offering 30-year fixed-rate jumbo loans of up to $2 million for 6 percent on Monday, with an origination fee of 2 points. A 5/1 ARM with the same number of points and a two-year prepayment penalty was available for 5.25 percent.
Sophisticated borrowers may even want to consider a jumbo loan that starts right out as an ARM loan, without an introductory fixed rate, said Paul Wylie, the founder and former chief executive officer of Metrocities Mortgage LLC.
Bank of America subsidiary Merrill Lynch offers a "PrimeFirst" one-month adjustable-rate LIBOR-based mortgage (LIBOR is an acronym for the London Interbank Offered Rate), for example, which as of Monday carried a rate of 1.75 percent on loans up to $2 million. The 25-year mortgage offers the option of making interest-only payments for the first 10 years, but the interest rate begins tracking LIBOR right away, without the fixed introductory rate of a 5/1 hybrid ARM loan.
Wylie, who now operates a Web site, Liborated.com, that provides information and strategy about the various LIBOR indexes, said such loans aren’t for everybody. With long-term rates also near historic lows, it can be a good time to lock savings on a fixed-rate loan.
"In this environment for residential loans, the vast majority of borrowers are choosing a fixed-rate mortgage," Wylie said. "We think that’s terrific for conforming and FHA loans, but especially for jumbo and super-jumbo borrowers — we think it’s important for them to have this information and to consider all options."
An ARM loan indexed to LIBOR or another index may be a good choice for those who have the financial means and the psychological temperament required to assume the additional risk, which Wylie compared to choosing an insurance policy with lower premium payments but higher deductibles.
While the one-month LIBOR is currently around 0.3 percent, it was at 5.72 percent as recently as September 2007, and reached nearly 7 percent in 2000, according to Liborated.com.
Wylie said the million-dollar mortgage on his own Southern California home is pegged to the one-month LIBOR plus 1.5 percent, meaning he’s paying a little more than 1.8 percent now, but would have been paying more than 7 percent two years ago. Merrill Lynch’s PrimeFirst loan caps out at 12 percent.
"We don’t expect one-month LIBOR to stay there — we expect it will go up. It’s just a matter of time," Wylie acknowledged. Most ARM mortgages that use LIBOR as an index are tied to the one-year LIBOR.
But short-term rates rarely move in lockstep with long-term rates, so ARM borrowers who want to move into a fixed-rate loan may still be able to take advantage of low rates, Wylie said. Rates on 5/1 hybrid ARMs haven’t been over 6 percent in a decade, he said, so a jumbo ARM loan could be a viable long- or short-term option.
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