Monday, August 14, 2017

Jumbo vs Conforming interest rate spread (MBA)

Last week I received an update from the Mortgage Bankers Association (MBA) regarding their chart of the week (below).  This chart was very interesting and timely for me as I was working with a client who was on the border of a conforming loan (max loan amount $424,100) and jumbo loan (above $424,100).  

The below email indicates jumbo rates averaged 0.25% higher than conforming rates during the recession.  In 2013, we saw a reversal where jumbo rates have primarily remained lower than conforming rates.  The reason for this is because jumbo loans do not require additional fees that conventional loans charge.  The additional fees that Fannie Mae and Freddie Mac charge have gone up over 2x their pre-crisis level. 

One thing to keep in mind is jumbo rates/fees more heavily depend on credit scoring.  The best conforming rates/fees are provided to borrowers with 740 or better credit scores while jumbo loans may provide the best rates/fees to borrowers with 760, 780, or even 800+ credit scores.  Jumbo loans often require larger down payments than conventional loans and may charge a higher rate if less than 20% down. 

Here is part of the email I received:

Source: MBA Weekly Applications Survey

The spread between the rates for jumbo loans and conforming loans historically averaged around 25 basis points and reached as high as 50 basis points during the recession. However, historical rate data from our Weekly Applications Survey shows that the spread narrowed after 2010. In fact, since late 2013 jumbo rates have been lower than conforming rates. Jumbo rates have been six basis points lower than conforming, on average, to date in 2017.

Banks flush with deposits have enthusiastically competed for jumbo loans.  Lenders with the ability to keep jumbo loans on their portfolios have been able to offer lower rates as they do not pay guarantee fees to the GSEs on these loans, and guarantee fees are more than double their level pre crisis.  The very competitive market for jumbo loans has also led to expanded availability of jumbo products to eligible borrowers. This trend was picked up by our Mortgage Credit Availability Index (MCAI), which has shown a significant increase in jumbo credit availability starting around the time the jumbo-conforming spread turned negative.

No comments:

Post a Comment