Jumbo Jumble > Increased conforming loan limits are just starting to improve pricing

DALLAS (MarketWatch, May 11, 2008) -- The stimulus checks may be in the mail but Americans are still waiting for another component of the federal stimulus package to bear full fruit.

Back in March, the conforming loan limits were raised for some of the country's most expensive markets. But only in the last week or so have buyers seen the cost of these so-called jumbo conforming mortgages come down to the point where they are within reach of conforming loans.

The goal of raising the limit was to bring interest rates on jumbo mortgages down to a more attractive level, said Debbie Dunn, executive vice president of CTX Mortgage, speaking during a panel discussion at the National Association of Real Estate Editors conference held in Dallas last week.

High-priced markets in California, for example, were expected to benefit when government-sponsored enterprises Fannie Mae and Freddie Mac were given permission to purchase these larger loans.

But so far, rates haven't dropped as expected, according to Dunn and others.

"The industry was anticipating that the mortgage guidelines were going to look like any other conforming mortgage and weren't thinking about the fact that they'd have to allow for the additional risk that the higher loan amounts brought," she said.

It takes a while for the marketplace to determine the proper pricing for a new mortgage product, and there's some additional risk that is taken on when a higher loan is made, she said.

The new conforming loan limits are now equal to 125% of the median house price in an area, with a minimum of $417,000 and, generally, a maximum of $729,750.

The delay in price adjustment on these jumbo loans has caught the eye of Barney Frank, D-Mass., chairman of the House Financial Services Committee, who has called for a hearing on the matter later this month.

"People assumed these spreads were going to come down, that an interest rate would be the same on a $729,750 as a $417,000 (mortgage)," said Steve O'Connor, senior vice president for government affairs of the Mortgage Bankers Association, who also spoke at the conference.

But loans higher than $417,000 are classified separately and haven't been as attractive to investors, he added.

"Investors aren't buying them (jumbo conforming mortgages) as much, the spreads aren't coming down," he said. "Right now, investors are skittish about how much of this stuff they want to buy."

Keith Gumbinger, vice president of HSH Associates, said in a telephone interview he has heard anecdotally that conforming jumbo rates have come down just in the past couple of days.

As of last week, the HSH mortgage survey showed the conforming average for a 30-year, fixed-rate at 6.03%, the expanded conforming (jumbo) at 6.41% and a true private market jumbo 7.18%. Before the credit crunch hit, the spread between the conforming and jumbo loans was closer to one-half a percentage point.

But last week's numbers marked a big decline for the expanded conforming loans, which fell from 6.68%. O'Connor expects jumbo conforming loan rates to continue to creep down in the coming months. The new limits, however, are temporary and expire at the end of the year.

[Photo Courtesy of ShutterCat7 | flickr]

Slower than molasses on a cold winter's eve, the new conforming loan limit has yet to make an impact on the starving consumer mortgage landscape.

And even if the new limit -- $729,750 for San Francisco home buyers -- hits the open market this summer, will it even be a boon to would-be mortgagees? At a less-than-stellar 6.41 percent on a 30YR Fixed, it's inconceivable that it would even dent the bottom line: the home owner's monthly mortgage payment.

The real reason to the sluggish and prodding effect of the new limits are hesitating investors, who aren't quite sure of how to proceed with the higher, and thus riskier mortgages. The reason why the mortgage market has slowed to screeching halt is due to the uncertainty in the economy, triggered heavily by the credit and mortgage crises.

Pay close attention to a few important keys in the upcoming weeks:

• If the ever-slowing job market could rectify itself, then perhaps investors would be more willing to take on these loans. Without people working and being compensated with a stable income, who exactly will be running to the lenders to purchase home loans?
• The oil prices, which have been vastly publicized, need to come down for not just the consumer, but big business as well. Can you imagine the travel industry's expense margins these days? Yes, the hurting corporate world's challenges do trickle down to the pedestrian consumer level, too.
  
• Foreclosures. The buzz word of 2007 reigns supreme again for much of 2008, and quite possibly the rest of the year. If the Guvment gets its way -- sans Dubya's plans to veto, of course -- the real estate market should continue to bounce back for the rest of the decade. (Wow, are we 19 months away from the 2010's?!).

Until the overall economy recovers, you can expect more of the same with the current mortgage loan deadlock. All you can do now is continue to tighten the financial belt, and suck it up.

Lower mortgage rates aren't in the near future -- yet.