"High Balance" Jumbo Mortgage Rates are near Conforming Rates, Well Below Super Jumbos
By: Vanessa Rodriguez
August 26, 2010 (FreeRateUpdate.com) – Interest rates between high balance jumbo mortgage loans and conforming mortgage loans continue to narrow. As of this writing, the rate on a 30 year fixed conforming mortgage loan is 4.00% with 0.7 to 1.0 point origination. The rate on jumbo mortgages is 5.00% with similar origination fees. Jumbo loans include loan amounts exceeding $417,000 for a majority of the continental U.S. Super jumbo loans are typically between $1 million and $10 million in loan amount.
In the past, high balance jumbo rates far exceeded those of conforming loans due to the higher risk involved. Now, however, recent development in the mortgage market has prompted banks to offer these loans at more affordable rates.
First, the Federal Housing Administration is tightening up lending standards. The FHA Commissioner, David Stevens, reported that the FHA will decrease its astounding 25 percent market share by making it more difficult for borrowers to qualify for FHA-insured loans. Therefore, the FHA has reduced allotted seller concessions, increased down payment requirements, and increased mortgage insurance premiums. Adding insult to injury, the FHA capital reserves dunked to an all time low of only half a percent. Congress mandates that the FHA maintain at least 2 percent capital reserves. There is much incentive for this government agency to hold liquid assets for fear of liquidation itself.
Secondly, the two GSEs, Fannie Mae and Freddie Mac, recently implored the U.S. Treasury Department for another bailout, which tips total taxpayer assistance to nearly $150 billion. Second quarter losses are abound as Freddie reports a net loss of $6 billion and Fannie a $3.1 billion loss. They request $1.8 and $1.5 billion, respectively, and, unlike AIG who plans to repay nearly 40 percent of its bailout by year-end, neither GSE proposes a repayment plan. Freddie commented, “…the company does not expect to earn profits in excess of its annual dividend obligation to Treasury for the indefinite future.” The additional bailout hedges against a wave of anticipated foreclosures in 2010 and 2011 caused by sub-prime loan resets.
The rising tide of bad loans is not only reasonable to assume, but some economists also believe it is imminent. An estimated 15 million U.S. mortgages are underwater, that is nearly 1 in 5 home mortgages, and negative equity amounts to nearly $800 billion. The GSEs are investigating delinquent loans for any signs of violations of the representations and warranties, such as fabrications made by borrowers or lenders, undisclosed debt, or faulty appraisals. Freddie Mac promises to take tough action against any banks that refuse to buyback these loans. During the first quarter, Freddie received $2.7 billion for buybacks. However, as of June, there are $5.6 billion repurchase requests that have not been satisfied. The Federal Housing Finance Agency, which regulates Fannie and Freddie, helps the GSEs get aggressive as it offers full-fledged support to collect repayment on defective loans. The FHFA subpoenaed 64 mortgage-backed security issuers, which guarantee against mortgage default, for potential loan buybacks. The added pressure on mortgage lenders forces homeowners into delinquency and, subsequently, foreclosure.
Another reason the spread between high balance jumbos and conforming mortgages rate is narrowing is that the bond market is strengthening. At the peak of the mortgage crisis in 2008, the spread was 170 basis points (a basis point is 1/100th of a percentage.) Today, the difference is about 40 basis points. When the market had gone haywire, the difference was very steep. In more-or-less “normal” economic circumstances, the spread is about 20 basis points.
Although, jumbo mortgage rates are faring well, super jumbo mortgages remain huge risks for lenders. Super jumbo loans are considered loan amounts between $1 million and $10 million, but there is no cap to the loan amount. Super jumbo loan amounts between $1 million and $2 million usually see rates about half a percentage higher than jumbo mortgage rates. However, any loan amount above $2 million experiences rates of 2 percent or more than jumbos. The lack of liquidity on these loans makes them extremely risky for lenders. Super jumbos are also very tough to sell. Constraints on the secondary market would cause lenders to retain and service super jumbos using their existing capital. Therefore, lenders are reluctant to originate these loans to begin with and aspire to make it difficult for borrowers to qualify for these loans by charging higher interest rates, reducing the LTV requirement, and increasing the level of income documentation.
The fact is, banks are incentivized to offer high balance jumbo mortgage loans at lower rates in order to stay in business. The FHA is making it more difficult for borrowers to obtain loans while simultaneously freeing up market share. The GSEs are asking for additional taxpayer dollars while expecting near term year-over-year losses. Fannie and Freddie threaten banks to repurchase shoddy loans while a flood of foreclosures is expected by year-end. Not to mention the financial reform bill that disseminates financial institutions deemed too risky. It’s sink or swim for lenders.