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.