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Builders Say Jumbo-Loan Woes Are Hurting Luxury-Home Sales

By Dawn Wotapka
Published: August 22, 2007

NEW YORK -(Dow Jones)- For the first time, home builders are admitting that the crackdown on jumbo-mortgage lending is depressing sales.

As a housing and mortgage crisis sweeps the nation, lenders are pulling back and raising the prices on jumbo loans bigger than $417,000. That especially squeezes Toll Brothers Inc. (TOL), a luxury builder whose average delivered home was priced near $700,000 earlier this year, and WCI Communities (WCI), seller of oceanfront condos with multi-million-dollar price tags.

Both companies reported losses early Wednesday.

“With all the problems surrounding mortgage-market liquidity, there is the risk that home building could grind temporarily to a near halt,” said Gregory Gieber, an analyst with A.G. Edwards.

Builders aren’t that pessimistic, but they acknowledge no recovery is imminent.

When Toll Brothers announced an 85% drop in fiscal third-quarter net before the market opened, Chairman and Chief Executive Robert Toll warned “mortgage- market liquidity issues and higher borrowing rates may impede some customers from closing, while others may find it more difficult to sell their existing homes.”

The Pennsylvania-based builder, which said it experienced “a much higher rate of cancellations than at any time” in its 21-year history as a public company, won’t provide earnings guidance or update previous forecasts.

Mortgage concerns were one of the reasons Daniel Oppenheim, a Banc of Americas Securities analyst, has a “sell” on Toll shares, which were up nearly 5% to about $22 mid-morning.

Meanwhile, during a conference call Wednesday, Florida-based WCI pointed out that as many of half of its buyers pay cash and nearly 23% of its buyers are getting mortgages through a mortgage venture that focuses on jumbo and noncomforming mortgages.

“We believe that we have sufficient availability of mortgage credit,” said President and Chief Executive Jerry Starkey.

WCI’s shares changed little Wednesday, trading around $8.

For the last few years, hefty mortgages have been available to anyone and everyone, even without documented income, helping fuel a dramatic housing boom. But then waves of buyers began defaulting, and lenders halted the riskier “sup- prime” loans to those with blemished credit. Now the fear has spread to “jumbo” loans bigger than $417,000, the limit for loans eligible for purchase and guarantee by Fannie Mae (FNM) and Freddie Mac (FRE). Some lenders have stopped offering them altogether, while others are raising their interest rates, likely expanding a borrower’s monthly payment.

While not every builder targets the well-to-do crowd, the industry is watching the jumbo-loan development and wondering what will happen next.

“They’re all going to be impacted to one degree or another; it’s a matter of to what extent,” said John Tomlinson, an analyst with Majestic Research. “It’s definitely not coming at a good time. The sector’s already weak as it is.”