Here’s something you don’t see very often.
Jumbo mortgages are usually 1/2% higher than the rates for conforming loans (under $417,000). But with all the turbulence lately, jumbo mortgage rates are LOWER than a conforming rates at two of the big three banks:
| Bank | ||||
| BofA | ||||
| WFB | ||||
| Chase |
If the biggest banks in the country aren’t adjusting their jumbo rates upward at the same velocity as the market has popped the conforming rates, it suggests that they might think this turbulence is over-heated – perhaps like the weather!
There’s more loan value to spread transaction costs across with a large loan. For the same reason, it’s easy to get a no-cost $600,000 refi but not a no-cost $100,000 refi.
But this recent action is concentrated in conforming because that’s what the Fed buys, and the market freaked out when the Fed hinted at quitting.
Bottom line I think the housing market is a lot more sensitive to higher rates than the media talking heads are trying to portray.
Ben and his boys have been busy all last week doing damage control.
Come on W.C., you have a great ability to read between the lines, and something is in play here.
We all hate the banks and think they are greedy pigs who conspire with the government to manipulate markets everywhere.
They could have easily raised their jumbo rates to 4.875% and nobody would have batted an eye; after all, the historical spread has always been 0.5%.
But they didn’t.
It must mean that the return is so valuable to them that they didn’t want to rock the boat. They must think that higher jumbo rates would stall the market – what else would stop them when they had a free pass to raise rates?
It also means that they could fund loans under $417,000 at the prevailing conforming rate, but NOT sell them to Fannie/Freddie, at least not yet. Why would you sell when holding that paper is just have rewarding as the jumbo paper.
They could hold all their new Fannie/Freddie paper and use as a club the next time Ben thinks about opening his big mouth.
Yes, I’m pretty skeptical of the banking cartel generally speaking, but this is an unusual event for them to be so reasonable, isn’t it?
Yup! As always everything these days is a over-reaction. Everybody wants to go straight to the final destination, nobody wants to be part of the journey. Neither the buyers at the beginning of the year nor the bankers now
It’s definitely a bizarre anomaly you’ve found.
Conforming loan rates should be at least equal if not lower than non-conforming, because conforming works exactly like non-conforming except banks get get a hugely valuable government guarantee on it.
If new Fannie/Freddie fees and/or paperwork hurdles have made Agency-guaranteed loans less attractive to issue, banks should theoretically be willing to issue conforming-size loans without the Agency guarantee at the same or better rate than jumbo.
So I think we have a temporary pricing anomaly due to dislocations in the Agency MBS market. Whether that anomaly gets resolved with higher jumbo or lower conforming rates remains to be seen.
But I don’t think the banks are suppressing jumbo in order to keep the real estate market alive. I think it’s a competitive market, and with 10-year Treasuries still in 2.5% range, banks are competing with each other on rates to get 4%+ on jumbos with high down payments and high credit scores. I would take that trade too.
The non-skeptical view would be that the market is so competitive that until one of the big banks raises it jumbo rate, the rest are stuck. They have to be critically aware and concerned about market share and be bonused on volume.
They have to keep the jumbos coming in!
Photo gallery of the year:
http://www.redfin.com/CA/Del-Mar/6036-Rancho-Diegueno-Rd-92014/home/4452877
Also in the neighborhood, the former drug house that was foreclosed and flipper bought for $1.13 last June:
http://www.redfin.com/CA/Del-Mar/15702-Circo-Diegueno-92014/home/4451474
Consider this thought. Maybe the government guarantee is actually worth more than the 1/2 point spread between conforming and non-conforming.
Think about who you’d rather loan money to. A doctor making $250K per year to buy a $1 million house or a construction worker making $75K to buy a $300K house. In my opinion the doctor would be a lower risk than the construction worker and I’d probably offer a lower rate to the doctor even though the total loan amount is larger.
It’s not that Jumbo rates are the same as conforming, it’s because the big banks are gouging the consumers on conforming and FHA/VA loans earning 6% premiums when in the past they made 4% or less. In other words, when the feds bought down the rate purchasing bonds, the banks NEVER dropped the rate and instead pocketed the extra YSP the feds created for them using tax payer money. Conforming rates should be at least a half percent lower than what’s advertised but the banks are too greedy to tell you that and screw you instead thus Jumbos now look attractive. Jumbos have always and will probably always be higher in rate unless the banks greed kicks in and keeps conforming where they are at today. It’s a scam in the end endorsed and approved by yours truly, The Treasury