I find myself writing about the ever-changing mortgage climate almost every week, but I think it’s important to keep apprised of the latest changes.
I’ve read various articles from other newspapers, some that have been completely inaccurate. I have also interviewed an official from the Federal Home Loan Mortgage Corp. (Freddie Mac), a government-chartered entity that purchases securities and mortgage loans from lenders.
• Freddie Mac and Fannie Mae have raised their loan limits to $729,750 in designated high-cost areas. The Washington metropolitan area is included.
Contrary to what you may have read or heard during the last couple of weeks, the interest rates offered for these new “conforming-jumbo” loans are not the same as the interest rates offered for the traditional conforming loans with balances that don’t exceed $417,000.
Expect to pay between 0.75 and 1.25 percent higher for a 30-year fixed-rate conforming jumbo loan. The conforming jumbo rates are indeed perhaps 1 percent or more lower than the traditional jumbo loans offered by various lenders. Still, as of this writing, a conforming jumbo 30-year fixed-rate is hovering near 7 percent.
In my mind, this is too high to stimulate a refinancing wave. Likewise, the rates are too high to stimulate the anemic housing market.
• “Risked-based pricing” is now the norm. A year ago, a borrower with a 680 credit score and 20 percent equity would receive the same rate for refinancing as a borrower with a 700 credit score and 30 percent equity.
Today, small differences in credit score and loan-to-value ratio will affect a borrower’s offered rate.
• It appears that Fannie Mae and Freddie Mac are making efforts to reduce the rates on their conforming jumbo-loan products. They have recently agreed to disclose a specific price they will pay for these loans up to 90 days ahead of the securitization.
This effectively lowers the pricing risk faced by lenders. Since lenders have reduced interest-rate risk, they should lower the interest rates on these jumbo conforming loans.
• Depending upon what you read and whom you talk to, the conforming jumbo-interest rates are expected to fall to somewhere between 0.40 and 0.75 percent higher than the traditional conforming loans, instead of the current 1- to 1.25-percent spread.
Meanwhile, economic reports send a mixed signal. Rising energy and food prices could trigger a substantial increase in inflation, which would put considerable pressure on interest rates.
At the same time, last week’s report on consumer sentiment came in at its lowest level in 26 years. Basically, this means Americans have not felt gloomier about economic conditions since 1982.
This does not bode well for healthy economic growth.
Let me conclude with some good news:
• Lenders are still eager to make mortgage loans to qualified borrowers.
• Home prices are no longer skyrocketing, creating buying opportunities.
• Loans guaranteed by the Federal Housing Administration (FHA) are accepting applications from folks who don’t have stellar credit, providing homeownership and refinancing opportunities.
• The loan limits for FHA loans in the Washington area have also been raised to $729,750.
It’s a crazy market. I’ll keep you posted.
Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail.
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