Jumbo Mortgage Rates to Fall

Fallout from the subprime lending crisis is pushing up rates on numerous large loans. Those taking on debt greater than a certain size to buy or mortgage refinance will feel the sting.

One reason rates are rising is due to a retreat by major lenders.

Last week, troubled Countrywide Financial - which makes nearly one in every five U.S. home loans - said it will cut its jumbo loans to 10% of its home lending. That’s down from 50% not even two months ago.

Jumbo loans are those of more than $417,000 that aren’t guaranteed by the government. The $417,000 threshold is set by the Office of Federal Housing Enterprise Oversight.

Conforming loans are $417,000 and smaller and meet certain borrower qualifying tests. The government often guarantees them, which fosters mortgage market liquidity. Jumbo rates have risen the most. That’s the case despite sound fundamentals for most of those big borrowers’ ability to pay on time.

“This (industrywide increase) is a knee-jerk reaction (to the crisis),” said Greg McBride, senior financial analyst at Bankrate.com.

And the increase has affected a broad array of borrowers. In many areas, middle-class buyers need jumbo loans.

If you are planning to borrow more than $417,000 to buy or refinance a home, try to wait, McBride says. Rates on jumbos may fall once the mortgage loan market steadies.

The subprime crisis was caused by nonconforming, typically smaller loans. Some subprime borrowers were able to provide scant documentation of income. Others got loans without being required to pay much if anything for down payments.

Still, things often worked out due to rising home prices. If a borrower could not make his payments, he could sell his home and end up with more than enough to repay his loan.

There were relatively few delinquencies before. But recently home prices have been flat or down. More subprime borrowers who were forced to sell couldn’t pay their debt.

Jumping Jumbos
The latest Bankrate.com survey found that jumbo mortgage rates averaged 7.43% for 30-year fixed-rate loans, going into Friday. That’s the highest rate since April 2002.

But 30-year conforming home loans averaged only 6.68%.

The spread between jumbo loans and conforming loans has jumped to 0.75 percentage point 18om 0.28 just three weeks ago. That’s larger than normal. Therefore, borrowing costs for people seeking to buy expensive homes are up.

These mortgage rates should come down, McBride says. That would happen when investors realize that default rates on jumbo loans have not risen from historic levels.

SOURCE: CNN Money