Jumbo Mortgage Interest Rates vs. Conforming Loans

There is an increasing disconnect between interest rates for “Conforming Loans” (those loans that meet the stringent requirements of FNMA and FHLMC which purchase these loans and which must be less than $417,000), and Jumbo Loans (those loans that are not conforming and usually in excess of $417,000), which are grouped into mortgage backed securites and sold to private investors. Investors are showing an increasingly reluctance to purchase these mortgage backed securities due to the turmoil in the credit markets, originally caused by the sub-prime mortgage debacle. HSH Associates, in their newletter for the week ending August 10, 2007 notes: “The average conforming 30-year fixed rate mortgage (FRM) actually declined this week, falling to an average 6.61% from 6.68% last week.. . The average 30-year FRM jumbo shot up from 7.09% last week to an average 7.40% this week in our weekly editorial survey.. . The difference in price between conforming and jumbo mortgages depends upon market conditions and investor appetite for the two, but commonly ranges between 1/8 to 3/8 of a percentage point. As recently as a month ago, that spread was 20 basis points (.20%), a fairly typical spread, but had surged to a bloated 31 basis points this week.”

The statistics for the average interest rate quoted for jumbo loans noted above has been somewhat distorted by some lenders quoting rates near 8%, which is essentially telling the market that they are not currently making Jumbo loans. As noted in the entry below, there are lenders currently making Jumbo loands near the 7% rate, which is 40 basis points (.4%) higher than the 30 year fixed rate conforming loan.  These abnormally large spreads between the interest rates for conforming and non-conforming loans should shrink as stability returns in the coming weeks to the credit markets.

Mortgage Market Update

Recent turmoil in the sub-prime mortgage markets spilled over to the other sectors of the mortgage market, and has significantly affected long term mortgage rates for non-conforming jumbo mortgages. These loans are dependent on lenders pooling these mortgages and reselling them as mortgage backed securities in the secondary markets, however investor interest in these mortgage backed securites decreased significantly, therefore raising the required interest rates on these mortgages to make them attractive to buyers, therefore leading to significant increases in jumbo mortgage rates. Some lenders were quoting 30 year fixed rate jumbo loans at 8%. Rates on fixed rate long term mortgages for conforming loans, however, have not been significantly affected.  There are lenders still making 30 year fixed rate jumbo loans, with interest rates of approx. 6.75 % with 3/4 points or 7% with 1/4 point. A popular program is a 7 year fixed rate jumbo with interest only payments at approx. 6 5/8 % with 1/2 to 3/4 points, with 10 year fixed rate options at a 1/8% higher interest rate.

Excerpts from HSH Associates newsletter for the week ending August 3, 2007:

“Mortgage borrowers and industry participants hoping for a quiet mid-summer had their hopes dashed anew this week, as more bad news pummeled select portions of the mortgage and lending markets. As is usually the case, traditionally-documented, good-credit quality borrowers are among the least affected by the stanching of certain forms of credit. According to the nation’s leading mortgage pricing survey, 30-year fixed rate mortgages rose by a lone basis point (.01%) to an average 6.88%, while hybrid 5/1 ARMs held on at 6.47% amid the swirling maelstrom.

News of expanding troubles related to mortgage-based investments continues to dominate the landscape. Because of investor pullback, certain mortgage products are said to be very dear right now, including alt-A and alt-doc programs, especially at higher LTV ratios. That pullback carried over into the non-conforming (“jumbo”) markets, where our editorial rate surveys found rates at some lenders jumping by as much as 7/8% for certain products, with rate quotations all over the ballpark for some (and “no quote” for others). As far as rates go, well, it’s all a matter of where you look. For top-flight borrowers, the continued downward pressure on underlying interest rates hasn’t yet translated into lower mortgage rates, but history says it ultimately will. For borrowers closer to the fringes of lending, your rates, product choices, and available credit are all becoming more limited.”