Jumbo Mortgages Don't Feel the Relief

Bloomberg posted an article today that effects many home owners in major US markets (read: New York, LA, San Francisco). While conforming mortgage rates have been dropping and mortgage applications are way up (45% or so in the last week), jumbo rates (for mortgages above $417,000) have stayed high. The spread between conforming and jumbos is more than 200 basis points, which is 10 xs above normal. However, there should be help on the horizon later in 2009. As more people refinance their conforming mortgages, banks will have increased liquidity, which they should be able to redeploy in jumbo land, which in turn should help to drive jumbo mortgage rates down. Also, as the Fed continues to buy Freddie and Fannie bonds, that too should help add liquidity to the market. So hold on all you New York jumbo mortgage holders...help should be on the way by late 2009!

By Kathleen M. Howley
Dec. 24 (Bloomberg) -- Jumbo mortgage shoppers in the most expensive U.S. housing markets such as New York and San Francisco aren’t getting much relief from lower borrowing costs.
The average 30-year fixed rate for home loans of more than $729,750 remains almost 2 percentage points above conforming rates and the spread between them may set a record this month, according to financial data firm BanxQuote.

Banks remain reluctant to lend after recording $678 billion in mortgage-related losses and writedowns in the past year and as house prices plunge. Jumbo mortgage rates may come down next year as more buyers refinance, helping banks improve liquidity, said Keith Gumbinger, vice president of mortgage-research firm HSH Associates Inc. in Pompton Plains, New Jersey.
“A guy in a low-cost market like Des Moines probably doesn’t care much about helping someone in New York buy a million-dollar apartment, but if he refinances his conventional loan, that’s exactly what he’ll be doing,” Gumbinger said. “He’ll be giving lenders the liquidity they need to rebalance their loan portfolios and compete for jumbo borrowers who typically are the best in terms of credit quality.”
The average 30-year fixed jumbo loan rate was 7.32 percent on Dec. 22, compared with 5.38 percent for a conforming loan, according to BanxQuote of White Plains, New York.

Wide Spread
The difference between them has averaged 2.13 percentage points in December, 10 times the average spread from 2000 to 2006 and above last month’s 1.95 percentage points that was the highest on record.

Jumbo borrowers New York, San Francisco, and Boston may see rates fall in 2009 because of Federal Reserve Chairman Ben Bernanke’s plan to buy at least $500 billion of agency debt, said Gumbinger.

The Fed’s mortgage-bond buying program, announced Nov. 25, also provides for the purchase of $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
Bernanke’s plan adds to previous government actions aimed at lower home-financing costs, including the September seizure of mortgage-finance companies Fannie Mae and Freddie Mac. As part of that takeover, the Treasury announced its own program to buy mortgage-backed securities to bolster the worst housing market in at least 70 years.

Loan Applications Rise
Mortgage applications in the U.S. jumped 48 percent last week as the lowest borrowing costs in five years promoted a surge in refinancing.

The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan rose to 1,245.4, the highest since 2003, from 841.4 a week earlier. The group’s refinancing gauge rose 63 percent and purchases gained 11 percent.

While many homeowners are trying to lower their mortgage payments, buyers remain on the sidelines as prices fall.

The median U.S. home price plunged 13 percent in November from a year earlier, the largest drop on record and likely the biggest decline since the Great Depression of the 1930s, the National Association of Realtors said yesterday in a report.
Home prices are tumbling as foreclosure-related sales accounted for 45 percent of the month’s transactions, according to the Chicago-based trade group.

“The real elephant in the room is falling house prices,” Glenn Hubbard, former chairman of the Council of Economic Advisers under President George W. Bush who is now dean of the Columbia University Graduate Business School, said in an interview on Monday. “We can fix this by lowering mortgage interest rates.”
Prices Sink
Declining prices won’t be helped by the Federal Housing Finance Agency’s announcement last month that it will lower the size of so-called jumbo conforming mortgages that can be purchased by Fannie Mae and Freddie Mac. Congress authorized raising the conforming limit of $417,000 to as high as $729,750 in about 90 of the nation’s most expensive housing markets in 2008 as a temporary measure to support housing.

On Jan. 1 that cap drops to $625,500 following the formula set out by July’s Housing and Economic Recovery Act. The law, known as HERA, specified a loan limit of 115 percent of an area’s median home price, rather than the 125 percent limit approved for this year by Congress, said Andrew Leventis, an FHFA economist. The change means more buyers in high-priced areas will have to use jumbo mortgages, he said.

The Fed on Dec. 16 cut its benchmark interest rate target to a range of zero to 0.25 percent and said it will add to the announced $500 billion in mortgage bond purchases as needed.
“Over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities,” the policy makers said in a statement.