Lenders are beginning to offer the much-anticipated “conforming-jumbo” loans authorized by
Congress a few weeks ago. Let me summarize what has happened.
Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac), two government-chartered entities, purchase mortgages from banks and package them into mortgage-backed securities.
This provides investment opportunities for institutional and individual investors. It also provides banks with more liquidity in order to make future loans. The conforming loan limit in most areas has been $417,000.
Congress recently passed a bill that allows Fannie and Freddie to purchase loans from banks with balances as high as $729,750 in some areas.
Many in my business were anxiously waiting for this to happen. The mortgage meltdown and subsequent credit crunch created an unprecedented interest-rate spread between conforming loans (those with balance up to $417,000 purchased by Fannie and Freddie) and jumbo loans in excess of $417,000.
While rates on conforming loans have dropped to reasonable levels — about 6 percent for a 30-year fixed rate with no points, rates on jumbo loans remained high.
Today, one would be lucky if they found a jumbo 30-year fixed rate at 7.50 percent with no points.
Traditionally, the spread between conforming and jumbo rates has been only about 0.25 to 0.50 percent. Today it’s more than 1.50 percent.
The bottom line is that folks seeking to borrow more than $417,000 will face far higher rates.
Over the last 18 months, though, clever mortgage brokers would help these folks by offering two loans to avoid the high jumbo rates. If a borrower was looking to borrow $550,000, he would take a $417,000 loan at a low conforming rate, and the balance of $133,000 would be borrowed in the form of a second trust.
While rates on second-trust mortgages are generally higher, they aren’t nearly as high as the recent jumbo rates.
Suddenly, Congress authorized new Fannie Mae and Freddie Mac loan limits. The most optimistic folks in the mortgage business believe that jumbo money will suddenly plunge to 6 percent.
Undoubtedly, such a scenario would stimulate the housing market and create a giant cash infusion into the economy through a refinancing wave. After all, wasn’t that the intent of the bill — to support the real estate market and jump-start the economy?
At last, the so-called “conforming jumbo” loans are available.
There’s one problem, though — a major problem. Depending upon the lender, expect to pay between 1 and 1.25 percent more for a Fannie/Freddie loan in excess of $417,000.
This means that if conforming rates are at 6 percent, folks seeking a Freddie or Fannie jumbo loan can expect to pay between 7 and 7.25 percent.
This isn’t much lower than what’s been offered for jumbo loans during the last couple of years.
Am I missing something, or is this legislation an exercise akin to digging a hole and filling it back up?
The legislation does allow Fannie and Freddie to purchase closed loans from banks that were originated from July 1, 2007. This is sure to provide some liquidity to banks that have been stuck with jumbo mortgage loans that couldn’t be sold on Wall Street.
However, for the time being, don’t expect the new loan limits to be a windfall for folks looking for a jumbo loan for a purchase or refinancing.
Henry Savage is president of PMC mortgage in Alexandria. Reach him by e-mail (henrysavage @pmcmortgage.com).
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