Why are jumbo rates so close to other rates?

Here is an interesting article in today’s paper regarding jumbo pricing. 

Why Jumbo mortgage rates have gotten so close to conforming rates- By Kathleen Pender- SF Chronicle- 6/18/13

The rate differential between jumbo and conforming mortgages is disappearing, thanks to a mix of factors.

They include rising guarantee fees on conforming loans, which make them more expensive relative to jumbos; fears that the Federal Reserve will soon scale back its purchases of mortgages backed by Fannie Mae and Freddie Mac; and a growing appetite on the part of banks and investors for jumbos and jumbo-backed mortgages.

Historically, the rate on jumbo loans — those too big to be guaranteed by Fannie Mae and Freddie Mac — had been around 0.25 to 0.5 percentage point more than the rate on conforming loans, which are below the Fannie/Freddie limit.

During the financial crisis, when investors lost their appetite for securities backed by non-guaranteed loans, the rate premium on jumbos soared, briefly hitting almost 2 percentage points.

The basic conforming loan limit has been stuck at $417,000 since 2006. To help provide credit in pricey areas, in 2008 the government “temporarily” raised the limit in high-cost areas to a percentage of the median home price, up to a maximum that has fluctuated between $729,750 and $625,500. The lower limit is in effect today and applies to most Bay Area counties.

This new class of high-balance conforming loans — those between $417,000 and $625,500 — had been priced in between true jumbos and true conforming, but these days they are looking more like pure jumbos.

For the week ended June 14, the average rate nationwide for a 30-year fixed-rate loan was 4.09 percent for conforming, 4.23 percent for high-balance conforming and 4.25 percent for jumbo, according to HSH Associates.

Some individual banks are offering jumbos as cheap or cheaper than conforming 30-year fixed-rate loans.

– RPM Mortgage was quoting rates of 3.875 to 4 percent Friday for both true conforming and true jumbo and a bit more – 4.125 to 4.25 percent – for high-balance conforming. (That assumes a loan-to-value ratio of 60 percent or lower; for a loan-to-value ratio of 80 percent, add one-eighth percentage point to each rate.)

– Chase was quoting an interest rate Monday of 3.875 on jumbos and 4.0 percent on conforming loans for a home purchase. For refinancings, the rate was the same – 4.25 percent – for both jumbo and conforming. (All rates assume a loan-to-value ratio below 60 percent and good credit.)

– Wells Fargo quoted a rate Monday of 4.125 percent with no points for all three loan types for refinancing. For purchase loans, the rate was 4 percent for all three loan types but the high-balance conforming loan had a small up-front fee (a half point, or 0.5 percent of the loan amount).

To learn more about why jumbos are now rivaling conforming loans, and what borrowers should do about it, see my column in Tuesday’s Chronicle here.

Posted By: Kathleen Pender ( Email ) | Jun 18 at 11:17 am

Listed Under: Banking, Housing, Mortgages | Permalink | Comments & Replies (0)Comments & Replies (1)Comments & Replies (0) : Post CommentPost CommentPost Comment