The news article in today’s September “Wall Street Journal,” indicates interest rates for more expensive home purchases fell below less expensive loan property purchases. Many Banking veterans have never seen this occur before. Jumbo Loans are too expensive for insurance by the government. With no government backing, conforming loans now backed by Fannie Mae & Freddie Mac typically have higher interest rates. Jumbo Mortgage loans are above or beyond $417,000. High priced areas in the nation may qualify for loans up to $625,000. Phoenix metropolitan’s Real Estate market is likely be set at the $417,000 level.
Why: Since the banks are cash abundant & are benefiting from the reduced funding costs associated with loans exceeding $417K, signs of interest rate volatility & the increasing yields on mortgage bonds preparing investors for the cooling off period of Federal Reserve bond buying programs (directly impacting mortgage bonds), increased interest rates on conforming loans; banks are now competing for more affluent property buyers historically more than ever. For example, Mortgage Bankers Association reported rates of 4.73% on a 30 year fixed rate conforming loan last week versus a Jumbo 30 year fixed rate mortgage at 4.71%. Because the Fed is attempting to cut down on Fannie & Freddie loan purchasing ability, cost absorption through increased fees impacting the bottom line of higher conforming mortgage interest rates. Jumbo Loans are not set by bond markets & kept on banks “balance sheets.” As more volume & emphasis increase by consumer deposits versus loan production, the surplus of making the money work at a minimal cost to them enables the bank to offer competitive interest rates through awarding Jumbo Loans.
How: Banks show jumbo loan borrowers are premium & are prone to immaculate credit with minimal debt to income ratios, cash liquidity for significant down payments, abundance of assets, & the ability to offer this very same consumer other financial portfolio products. Banks confidence through the increase of property prices & the return base of data supported by a risk adjusted basis analysis is gaining momentum.
Example: Buyer received a fixed rate of 4.6% on a 30yr. Jumbo Loan with 10% down back in July. Another. Commercial banks are also participating just as well.
History: According to HSH.com a financial publisher, a Jumbo Loan in the past ran at .25% higher than conforming loans & went as high as 1.8% in 2008. Last November the variance was .5%. From a strategy perspective, when standard interest rates on the conforming loans were below 4.5%, there was minimal motivation given the interest rate for banks to compete for jumbo mortgages since these loans would be sold off & banks would not be adding these transactions to their books.
Reference Source: Timiraos, N (2013). Jumbo Mortgage Rates Fall Below Traditional Ones A Flip that Hasn’t Happened Before, say Lending Executives. The Wall Street Journal. Retrieved from http://online.wsj.com/article/SB10001424127887323893004579055283906962194.html.
Disclaimer: Please contact your qualified mortgage professional for current up to date & qualification lending rules & regulation measures. This blog post is an informational update based on the Real Estate/Economic Industry events. The information here within does not serve as tax or legal information, & we strongly advise you seek the appropriate professional for further portfolio planning.