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Is the JUMBO Market Loosening up?

There has been an improvement in the interest rates available for Jumbo Mortgages, and that is encouraging news.  In addition, some lenders are even lowering the amount of down payment required in the Jumbo loan programs- which is even more good news.

Let’s begin with some basics.

Jumbo mortgages are those mortgages which exceed the Fannie Mae/Freddie Mac acceptable loan amounts (referred to as conforming loan amounts).  Those thresholds are determined annually on a county-by-county basis based on average sales prices of homes and the number of units in the home.  Where I come from (Long Island, NY) is considered a “high-cost area”, which allows us to close Conforming Loans on a one-family home up to $729,750.  Any mortgage, above that $729,750 limit, is classified as Jumbo.

Now let’s talk a little history.

There was a time in the Mortgage World that we refer to as “B.S.” (Before Subprime).  In that world, there was a .25% to .375% higher interest rate on Jumbo Mortgages.  That additional rate was the result of two factors- risk and supply.

First, let’s address risk.

Mortgages are bundled and pooled into Mortgage Backed Securities.  If there are two pools of $10,000,000, and one pool has fifty $200,000 mortgages, and the other has ten $1,000,000 mortgages, and ONE loan defaults in each pool, then the damage to the performance of the pool is more dramatic on the Jumbo pool.  More risk, higher price.

Second, let’s look at supply.

By supply, I am not talking about the number of loans….rather, I am talking about the supply of purchasers of mortgages.  By eliminating Fannie Mae and Freddie Mac as buyers of these Jumbo Loans, Jumbo MBSs lose the biggest purchaser of mortgages in the world and are forced to provide higher yields (through higher rates) to attract other buyers.

Back to the history lesson.

One result of the Subprime Mess was the exodus of buyers in the MBS World.  Mortgages, which had always been seen as high-quality, low-risk vehicles for investment, were suddenly viewed as unstable.  Those non-Fannie Mae/Freddie Mac purchasers of mortgages ran for the hills.  There was no ability for the government to jump in and keep rates low (as there was in the conforming side).  So the yields for Jumbo MBSs were pushed higher while conforming loans were pushed lower.  The result was a change in spread between Conforming and Jumbo loans from .25% or .375% up to 1.7%…..in addition, down payment requirements became more stringent.

We had very qualified (excellent credit, good income, strong reserves) borrowers who were looking at rates over 7%, while seemingly weaker borrowers were closing their loans around 5%.  The higher cost was not attributable to more risk, but solely to few buyers of the Jumbo MBSs.

But time heals all wounds.

Today

Jumbo rates have worked their way down some (and conforming loans have moved up some), and the spread is a somewhat more reasonable .75% to 1% (and less required money down).  Lower rates make homes with those high loan balances more desirous.

This is not to say lending requirements have eased across the board for Jumbos; borrowers still need excellent income, assets and credit to qualify, but it is a bit of a silver lining and something that we can point to with some optimism.


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