On September 4, 2013, the online Wall Street Journal reported an event that has not occurred in recent memory. The chances of seeing it happen in our lifetime was unfathomable – like a Big Bank, overcome with remorse, confessing its sins of greed, pride, avarice, gluttony, and offering the American Public their money back. Well, almost as unfathomable….
Actually, nothing of that magnitude occurred. I confess to a bit of hyperbole. But the event was unusual: Mortgage rates for jumbo loans fell below conforming loan rates. For a discussion of the entire article, go to the link here.
Here’s the background: Conforming loans are those that Fannie and Freddie [the two big government sponsored enterprises, or “GSEs”] buy from banks, like those Wells Fargo, U.S Bank, etc. make to borrowers that “conform” to the GSE’s guidelines. With limited exceptions, the maximum conforming loan amount permitted by the GSEs is $417,000.[1]
Loans above these amounts are called “jumbos” and the GSEs will not buy them – i.e. they are not “conforming.” What this means is that lenders who make jumbo loans generally have to carry them in their own portfolio, and for that they charged a higher interest rate. With the exception of cash buyers, or those with enough funds to bring the loan amount below $417,000, this meant that higher-end homes could be harder to sell; the pool of available buyers was smaller. According to the article, the spread between conforming and jumbo rates was:
1.8 percentage points during the financial crisis in 2008, but (has) narrowed in recent years. Last November, the spread was just 0.5 percentage points.
The obvious effect of the higher rates over the past few years meant that some potential buyers of higher-end homes were simply priced out of the market due to the larger monthly payments required to service a jumbo loan.
According to the recent online WSJ article:
The average 30-year fixed-rate mortgage fell to 4.73% last week, from 4.8% the week before, according to the Mortgage Bankers Association. The average jumbo 30-year fixed-rate mortgage, meanwhile, dropped to 4.71%, down from 4.78%.
What is the reason for this historic parity between conforming and jumbo rates? One is that banks have been awash in money for the last several years, thanks to TARP, the federal bailout program. It was designed with the intention of making more money available for banks to loan out. Problem was, the banks held on to their money, pulling up the ladder on their lending programs, so that only the folks who didn’t need a loan could qualify to get one. Now they’re ready to dip their collective toes back into the jumbo loan marketplace. Secondly, Fannie and Freddie, who, until lately, seemed to be perpetually on the verge of financial oblivion, are charging their originating banks a higher guarantee cost for the loans they buy. This added expense gets built into the interest rates the originating banks charge their customers for conforming loans. The result is that the rates for both types of loans are now approaching parity.
This is a very good thing, especially for the many owners of higher-priced homes who have been unable to move them for the past five or more years, due to the high cost of jumbo loans. While there are those who might have little sympathy for these folks, it should not be forgotten that a rising tide lifts all boats. If we are to thrive and survive, all segments of the populace must benefit. Sorry Barack, I never knew thee.
[1] In certain “high cost” housing markets, such as California and New York, the maximum loan amount is $625,000.
