The spread between conforming loans (less than $417,000) and Jumbo loans remains very large, at about 100 basis points (1%). Conforming 30 year fixed rate mortgages can be made at just over 6%, while 30 year fixed rate jumbo loans are just over 7%. Historically, this spread has only been about 20 basis points (.2%). As the commercial mortgage backed securities market stabilizes, hopefully this spread will shrink, however it may take up to 6 months to do so.
Excerpts from HSH Associates Newsletter for the week ending September 14, 2007:
“Adding a shakier economy to an already jittery credit markets has helped push mortgage rates down to levels seen since just before summer began. While the disparity between conforming and jumbo mortgage rates hasn’t narrowed, both series managed a decline this week. Conforming 30-year fixed rates slipped slightly more than did jumbos (a 13-basis-point decline compared to 10). It was the second week that these numbers moved in tandem, suggesting at least some investor interest in non-conforming mortgages. Overall, the average for a 30-year fixed-rate mortgage (average of both conforming and jumbo loans ) slipped by 15 basis points (.15%) to 6.77%, while the five-one Hybrid ARM shed 13bps to land at 6.57%.
After the rising level of mistrust washed across markets in August, many different markets which function on trust have been affected, including Commercial Paper, overnight loans between banks (including LIBOR), non-conforming mortgages, and Treasury markets. Because they didn’t trust the quality of the assets being pledged, those firms and banks which would put up money on a short-term basis against assets in the Commercial Paper markets stopped doing so, crimping the availability of credit to businesses (including those which make mortgages). This became the case in overseas markets, where the short-term cost of borrowing money (LIBOR) began rising to cover perceived risks. Also, investors who would buy mortgages pulled back, as they could not trust the quality of the assets or that a market to resell those loans at a profit would exist when or if they wished to unload them. Finally, money roared into the most trusted assets, namely US Treasury obligations, whose prices soared and yields plummeted over the past few weeks.
But are those markets beginning to repair themselves? Rumor has it that Commercial Paper markets have begun to loosen somewhat this week, even as the Fed has been lending more money though its discount window to help provide liquidity at a competitive price. If not improved, mortgage markets do seem to have stabilized somewhat.
Mortgage rates moved a fair bit this week, rather more than we expected. Based upon that, and with regards to how the Treasury market performed this week, it does seem likely to us that no improvement in mortgage rates should be expected next week. ”
Fixed Rate Variable
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Note: The above fixed rate loan rates are an average of both conforming loans and Jumbo loans