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Cost of Jumbo Improving, But Temporary Limit Leaving

Jumbo-conforming spread 0.55 percentage points

May 22, 2011

By SAM GARCIA Mortgage Daily


portrait of Sam Garcia

Despite a slight uptick in the cost of a jumbo loan last week, home buyers who need a jumbo mortgage have seen their costs drop over the past 18 months. But with the temporary jumbo limits set to expire in a few months, a group of borrowers with loans of as much as $0.7 million will no longer have a government-supported option.

The 30-year conforming fixed-rate mortgage retreated again, nudging down to 4.77 percent from 4.78 percent seven days prior in the U.S. Mortgage Market Index report from Mortech Inc. and MortgageDaily.com for the week ended May 20.

But the jumbo 30-year mortgage rate increased, to 5.32 percent from 5.30 percent.

The inverse activity pushed the jumbo-conforming spread, which is how much more a jumbo borrower has to pay versus someone whose loan was no more than the $417,000 conforming limit, to 0.55 percentage points. Last week, a jumbo loan cost just 0.52 percentage points more than a loan that conforms to the loan limit -- which is set by the Federal Housing Finance agency.

Still, consumers opting for a jumbo mortgage are better off now than a year ago, when they were paying 0.80 percentage points more for a "non-conforming" loan.

In addition, the spread has improved considerably from December 2009 when the Mortgage Market Index was launched. Jumbo consumers at that point were paying rates that were 1.13 percentage points higher than their conforming counterparts.

As investors abandoned securities with mortgages that weren't backed by the U.S. Government at the height of the financial crisis, the Economic Stimulus Act of 2008 was passed -- temporarily raising the conforming limit to $729,750 in high-cost areas. But the Barack H. Obama administration's plan to have the government reduce its interest in the mortgage market has the temporary extension set to expire at the end of September.

Loans insured by the Federal Housing Administration are also going to lose the temporary limit of $729,750 created by the law.

Big banks, however, are likely to step up their lending to jumbo borrowers -- who traditionally have had better credit, more income and bigger down payments than conforming borrowers.

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