Jumbo mortgages on sale

A strange thing is happening in mortgage markets: jumbo loans (typically, those above $417,000) are being offered at the same rate as conventional loans and in some case for even less.

Conventional mortgages, below $417,000, are normally sold to Fannie Mae (FNM) or Freddie Mac (FRE). The originating bank has no continuing interest in the loan, it just receives a fee from selling the loan on.

FNM and FRE do not buy jumbo loans, so normally the originating bank retains the loan (in some case the loans are packaged into pools and sold to investors). Because the banks retain the risk and utilize their own capital they charge a premium interest rate.

Historically, that premium has tended to be 3/8 – 1/2%, although during the financial meltdown the spread jumped to as much as 2%. But today there is little to no premium. Why not?

There seem to be several reasons:
1. FNM and FRE have added on new fees (thank you Congress) making their loans more expensive.
2. The housing market has been recovering and banks are more willing to take on housing risk on their balance sheets.
3. The economy remains weak and so is traditional borrowing demand from banks’ business customers.
4. With interest rates to savers and depositors so low, the banks are making a wider spread on jumbo loans today than they were during the boom days.
5. More affluent borrowers give banks better opportunities for cross-selling other products such as credit cards and brokerage accounts

What is the outlook for mortgage rates? At a meeting this week the Federal Reserve in Boston said that the Fed had been surprised by the reaction in mortgage rates following its suggestions that it might reduce its purchases of mortgage-backed securities at some point in the future. Subsequent economic data showed that the economy was not as strong as the Fed believed and the housing market was not yet robust enough to withstand a sharp jump in mortgage rates.

With Congress just undergoing a worldwide public humiliation and the promise of a repeat in three months’ time, it stretches credibility to believe that the Fed will do anything to undermine the current +/- 2% economic growth. And it seems certain that the Fed will wait for confirmation of a stronger economy before making any move to increase interest rates.

With a Congress unable or unwilling to act on fiscal policy to encourage growth, we are back once again to being a one trick pony – the Fed pouring cash into the economy, thereby ensuring that interest rates remain low.

Which raises the question of what will happen to the demand for housing. The last month has seen a marked slowdown in activity. Confidence has been hit, and now that the drama of a Government shut down has receded, the problems – and costs – of the new health care law will become more apparent.

As far as the local market is concerned, we are very short of inventory at the lower end, where demand remains, and very long of inventory at the higher end, where demand remains…..missing.

The optimists among us will hope that somebody knocks some sense into Congress so that, by January at least, a serious set of reforms is passed and we can have some confidence in the future. With the autumn slowdown, this and a mild winter could set up a very good spring housing market. If Congress acts…..

If you are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 781.631.1223 or andrew@HarborsideRealty.com.

Andrew Oliver is a Realtor with Harborside Realty in Marblehead.

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