Once in a blue moon economic theories and trends break from conventional rationale. Over the past two weeks this “blue moon” appeared in the mortgage loan market concerning conventional and jumbo mortgage rates. For the first time that lending executives can remember, the interest rate on the jumbo 30-year fixed-rate mortgage (4.71%) dropped slightly below the conventional 30-year fixed rate of 4.73%, according to the Mortgage Bankers Association. “In my 30-year career, I’ve never seen non-conforming loans priced below conforming loans,” said Brad Blackwell, executive vice president of Wells Fargo Home Mortgage. Typically jumbo mortgage rates are at least .25% above conventional mortgage rates.
Jumbo mortgages exceed the $417,000 limit set on conventional loans (in most areas) and are not backed by government-sponsored enterprises (GSEs). Conventional mortgage loans fall below $417,000 and are backed by GSEs (Freddie and Fannie). So what is causing this anomaly?
Conventional mortgage loans have become more expensive due to higher guarantee fees charged by GSEs to the companies that sell their loans. These fees have increased by more than .25% over the last three years. The higher guarantee fees result in higher mortgage interest rates. Conventional mortgage rates are also closely tied to how mortgage backed securities (backed by GSEs) trade; and therefore, follow the increase in mortgage backed interest rates.
Jumbo mortgage loans are a bit different in nature. They are not as securitized as conventional mortgage loans, tend to be carried on the bank’s balance sheet, and are tied to the bank’s cost of capital, which has not increased in this environment. Lou Barnes, a mortgage banker in Colorado commented on this situation, “Commercial banks are just desperate to book an asset that will pay something.”
Wealthy Americans are taking advance of this rare occurrence and going on a shopping spree. According to recent data from Realty Trac, the percentage of people buying houses in the price range of $1-$2 million with a jumbo mortgage increased to 63% in July, up from 49% a year over year. Properties priced at $2-$5 million increased to 46% from 27%. This could be correlated to still historically low interest rates and the opportunity to buy property before prices appreciate further. For these wealthy Americans who are still sitting on lots of cash, this is more of an investment and financial decision rather than needing a roof over their heads. Some believe this trend could continue if the cost of capital for banks remains stable while demand for mortgage loans continues to grow at a steady pace.
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Sources: http://www.mortgagebankers.org/NewsandMedia/PressCenter/85594.htm http://www.realtytrac.com/