Jumbo Rates Lower Than Conforming Rates

Below is a recap of 2013 loan limits, a breakdown of the three loan tiers in the U.S., and rate differences between tiers. It helps explain an important rate dynamic happening right now. Rates usually rise as you move up the three tiers of loan amounts—conforming loans to $417k, high-balance conforming loans from $417k-$625k, and jumbo loans above $625k. But jumbo rates are currently about .25% lower than high-balance conforming rates.

A quick history of post-crisis government intervention in rate markets explains why.

There used to be only two tiers of loan amounts. Loans to $417,000 were conforming and everything above was jumbo. But a second tier of conforming loans—called high-balance conforming—was created in the crisis era because the jumbo securitization market froze from Fall 2007 until 2012. This freeze meant no liquidity and therefore no ability to offer low rates to borrowers with loans above $417k, which would have made the housing and economic crisis even worse. The high-balance conforming tier came with rates slightly higher than the conforming tier, but made it so Fannie and Freddie could buy $417k-$625k loan sizes from lenders—thus keeping rates low for these loan sizes—until the jumbo market thawed.

Then of course there was the government’s quantitative easing (QE), a program where the Fed started buying Fannie/Freddie mortgage bonds (agency MBS)—which are bonds comprised of conforming and high-balance conforming loans. The Fed announced QE on November 25, 2008, and they began buying agency MBS on January 1, 2009 and have continued through today.

This is the primary reason rates on loans to $625,500 have been so low. But it’s not just from the Fed buying MBS, it’s also from private investors buying. The investor strategy since that November 25, 2008 QE announcement has been to beat the Fed in and out of the agency MBS trade. Case in point: rates dropped a full 1% on a massive MBS rally from November 25, 2008 to January 1, 2009 as private investors piled into agency MBS before Fed buying even began.

What we’re seeing now is a reversal of that strategy. As speculation increases about the Fed putting the brakes on their agency MBS buying, private investors have been selling, which has caused rates on loans to $625,000 to rise about .75% since January.

Meanwhile, the jumbo MBS (or non-agency MBS) market has been ramping up. According to Bloomberg data, from 2008 to 2010 there were no securitizations of newly issued jumbo mortgages. Securitizations of newly issued jumbo mortgages totaled less than $1 billion for 2010 and 2011 combined, totaled $3.5 billion in 2012, and total about $6 billion so far this year.

Still a far cry from a peak of $1.2 trillion in 2006, but it’s enough liquidity to do two things:

(1) make jumbo lenders very agressive on jumbo rate pricing

(2) incentivize jumbo lenders to go back to the pre-crisis model of using jumbo products for all loans above $417,000

The result of all this agency and non-agency mortgage trading activity is that jumbo rates are about .25% lower than high-balance conforming and about the same as true conforming.

The Fed’s QE activities don’t impact the non-agency MBS market so that market isn’t selling like the agency MBS market is right now. It could be a short term phenomenon that jumbo rates are the same or lower than conforming loans, but for now it’s good news for rate consumers with loans above $417,000.

It’s also a good sign of broader recovery because it’s evidence that private markets are again capable of outcompeting government-subsidized markets.

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2013 CONFORMING LOAN LIMITS

Tier 1-TRUE CONFORMING: Lowest rates for loans to these limits:
-$417,000 (1 unit)
-$533,850 (2 units)
-$645,300 (3 units)
-$801,950 (4 units)

Tier 2-HIGH-BALANCE CONFORMING: Rates .125 to .25% higher than Tier 1 for loans to these limits:
-$625,500 (1 unit)
-$800,775 (2 units)
-$967,950 (3 units)
-$1,202,925 (4 units)
-High-Balance limits vary by county: find yours here

Tier 3-JUMBO: Rates normally .375% to .5% higher than Tier 1 for loans up to $2m, but jumbo rates are currently about the same as Tier 1 conforming.

2013 FHA LOAN LIMITS

Tier 1-TRUE FHA: Lowest rates for loans to these limits:
-$417,000 (1 unit)
-$533,850 (2 units)
-$645,300 (3 units)
-$801,950 (4 units)

Tier 2-HIGH-BALANCE FHA: Rates often same as Tier 1 for loans to these limits:
-$729,750 (1 unit)
-$934,200 (2 units)
-$1,129,250 (3 units)
-$1,403,400 (4 units)
-High-Balance limits vary by county: find yours here
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Related:
- State Of The Jumbo Mortgage Market (WSJ – with me)

- Overview of FHA Changes & Fee Hikes As Of June 2013 (TheStreet – by me)

- $RWT, $JPM, $TWO, $NLY, $MBB, $TLT, $TBT