Traditionally, conforming rates are lower than jumbo rates. But that difference has narrowed and even inverted at times in recent years
I keep hearing about how higher conforming loan limits will help the consumer, but in my area jumbo rates are actually equal to and many times lower than conforming rates. How does raising the limits help the consumer?
–Gerald from Texas
That is a great question. I will start with something you did not ask, but certainly is part of your question. Traditionally, conforming rates are lower than jumbo rates. Yet, this has not always been the case in the past few years. Why has the spread between conforming and jumbo narrowed and actually inverted at times?
The answer goes back to the Great Recession. One result of the financial crisis was the collapse of the secondary markets. Before this time, and going back to the Savings and Loan crisis of the late 1980's, lenders had been selling both their conforming and jumbo products. Because the conforming market was larger and more efficient, rates were lower for these products -- or in secondary language, the price received for these products on the open market was higher.
With the collapse of the secondary markets, Fannie, Freddie and Ginnie became the only game in town. Jumbo products had to be placed in banks' portfolios. Therefore, the banks and other jumbo investors priced these with less free-market guidance as to the real worth of these loans. More recently, as refinance volume has waned, jumbo investors have gotten more aggressive in their pricing because they are hungrier for product. Will this continue? One of the goals of Dodd-Frank was to re-establish investor confidence in the secondary markets. Thus far results have been mixed. Next week we will get to the root of your question, which is: If jumbo rates are the same, how do higher conforming limits help the consumer?
–Dave
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].
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–Gerald from Texas
That is a great question. I will start with something you did not ask, but certainly is part of your question. Traditionally, conforming rates are lower than jumbo rates. Yet, this has not always been the case in the past few years. Why has the spread between conforming and jumbo narrowed and actually inverted at times?
The answer goes back to the Great Recession. One result of the financial crisis was the collapse of the secondary markets. Before this time, and going back to the Savings and Loan crisis of the late 1980's, lenders had been selling both their conforming and jumbo products. Because the conforming market was larger and more efficient, rates were lower for these products -- or in secondary language, the price received for these products on the open market was higher.
With the collapse of the secondary markets, Fannie, Freddie and Ginnie became the only game in town. Jumbo products had to be placed in banks' portfolios. Therefore, the banks and other jumbo investors priced these with less free-market guidance as to the real worth of these loans. More recently, as refinance volume has waned, jumbo investors have gotten more aggressive in their pricing because they are hungrier for product. Will this continue? One of the goals of Dodd-Frank was to re-establish investor confidence in the secondary markets. Thus far results have been mixed. Next week we will get to the root of your question, which is: If jumbo rates are the same, how do higher conforming limits help the consumer?
–Dave
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].
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