As the housing market shows tenuous signs of stabilization, interest rates on mortgages for buyers of large homes have quietly sunk to four-year lows. Rates on 30-year fixed jumbo mortgages—in most markets, those that exceed $417,000—averaged 6.14 percent for the week that ended September 18. That's down sharply from 7.36 percent a year earlier and the lowest weekly average since September of 2005, according to HSH.com. Here are five things you need to know about the development:
1. Banks tip toeing back: The market for jumbo mortgages—which are too expensive for Fannie Mae or Freddie Mac to purchase—was decimated by the credit crisis that erupted in the late summer of 2007. Lenders, no longer able to sell large home loans to investors in the secondary market, became reluctant to make such loans. As a result, jumbo rates marched higher. But in recent months, several large banks have demonstrated a renewed interest in the market. Bank of America, JPMorgan Chase, and Citigroup have all announced plans to issue more jumbo loans. This revived competition is the primary factor driving rates down, says Guy Cecala, publisher of Inside Mortgage Finance. "There are enough players out there that if you are shopping for a jumbo mortgage these days, you can call two or three lenders and get quotes from them," Cecala says. "Before, you couldn't even do that."
2. Money to be made: As fears of a full-blown economic meltdown eased, banks began to identify jumbo mortgages as potentially profitable investments, says Keith Gumbinger of HSH.com. Since buyers seeking large home loans had few alternatives, banks could demand larger down payments and turn away anyone but those with the most impeccable credit profiles. At the same time, profit potentials were greater in the jumbo mortgage market: Jumbo loans could yield more than 1.5 percentage points more than smaller, conforming fixed-rate mortgages and sometimes twice as much as ultrasafe 10-year treasuries. By getting into the jumbo mortgage market, "you can go make an investment to the best-heeled customers in the country, you have full control over underwriting, you can pick and chose whatever credit scores you want, . . . and you can make a yield that is nearly double the next, 100 percent guaranteed investment," Gumbinger says.
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3. Smaller risk premiums: As more banks have returned to the market and the economic climate has turned less terrifying, banks became willing to accept smaller risk premiums. The spread—or difference—between jumbo mortgage rates and yields on 10-year treasuries has declined from 4.77 percentage points in the last week of 2008 to just 2.69 for the week that ended September 18. Although that's still significantly wider than normal—the spread should be about 1.80 percentage points in a smoothly functioning market—it's a clear indication that the appetite for jumbo mortgages is increasing.
4. Still a tiny share: Despite the more attractive rates, the jumbo mortgage market is a shell of its former self. Jumbo mortgages make up only about 5 percent of the total mortgage market these days, compared with its 15 percent share in 2007, Cecala says. The market remains anemic largely because the investors who once purchased jumbo loans from banks—and suffered huge losses in the housing crisis—haven't returned. "There is still no secondary market for [jumbo] mortgages," Cecala says. As a result, banks keep these loans on their own books, rather than selling them to investors and using the proceeds to make more loans.
5. Tough to obtain: Even though jumbo rates have fallen to attractive levels, not all borrowers will be able to get their hands on them. That's because banks have jacked up their lending standards to protect themselves against defaults. As a result, jumbo lenders may demand FICO scores anywhere from 730 to 750, down payments that could range from 20 to 40 percent, and more stringent income documentation. "The rates we are talking about are [for borrowers in] ideal circumstances," Cecala says, "when your credit is perfect and you have got a ton of money."