Balancing Risk with Affordable Financing

Lower Loan Limits & Higher Costs of Borrowing

An interesting phenomenon is taking place within the financing world these days …Lower loan limits can mean a higher cost of borrowing

     What “used” to be … doesn’t “remain that way” long!

This has always been the case in quickly-changing JUMBO

financing.  JUMBO loans are defined as those loans above $417,000 on Single-Family Residences (except in those areas considered as more high cost*  (*See me for more info). 

JUMBO loans are typically financed through:

  • Private lenders
  • Banks
  • Equity firms, security companies, etc.

There is NO government agency backing for JUMBO loans, should they go bad … i.e., there is no Fannie Mae, Freddie Mac, or FHA to “absorb” the loss.

So why are JUMBO loans becoming less of a risk?  And why are they enjoying Interest Rates often lower than those found on other loans? 

The Answer:  Competition!  These days competition exists amongst lenders for solid, performing loans.  Also a big factor … there is less intervention from Agencies on JUMBO loans and fewer rules and fees are being applied during their financing.

During the last remaining months of 2013, Interest Rates on normal “conforming” loans (conforming meaning loans sold to Fannie/Freddie) had increased sharply, while Interest Rates on JUMBO loans remained relatively unchanged.

Again … why?  JUMBO Interest Rates are less influenced by “trading” of bonds, treasuries, and mortgage-backed securities.  They are more influenced by banks’ “costs of money”, and those costs have remained consistently low during these times of “Fed Intervention” and zero borrowing costs.

The spread at which JUMBO loans … or what is considered as “generally sound” loans … are made, remains profitable.  At the same time, JUMBOs earn banks lending on them, a “good mark” from Regulators, which in turn encourages the banks to minimize their risks even further.  JUMBO loans are often made on Adjustable Rate Mortgage (ARM) terms … so banks/lenders are not left holding a large loan at historically-low interest rates for longer terms.

Another phenomenon that is currently in play for traditional mortgages (those that fuel the everyday world of finance for real estate purchases), is that the cost of doing business for lenders (no matter what their platform) is going UP.  Lenders once again are finding themselves bracing for higher “G-Fees (Guarantee Fees).  Fannie Mae and Freddie Mac Agencies fees are rising late in March of 2014, if these Agencies get their way.

Guarantee Fee may be delayedSome experts are now saying that the new Director of the Federal Housing Financing Agency (FHFA), Mel Watt, will delay the implementation of the Guarantee Fee and risk-based pricing plan.  He’ll do so, at minimum, until he  has had a chance to fully evaluate the proposed hikes in borrowing and the impact they’ll cause on the industry and the housing recovery.

The net effect impact on borrowing/mortgage loans is often seen quoted by those same experts as 4/10ths (.40) percent … or nearly a half percent higher Interest Rates … or corresponding higher costs for borrowing at lower rates.

Balancing Risk with Affordable Financing:  Lower Loan Limits & Higher Costs of Borrowing …
Bottom line?   Don’t look for lower Interest Rates in the conforming every day world soon.  On the other hand, enjoy (and take advantage of) the exceptionally low, JUMBO Interest Rates seen currently.

And stay tuned … it’s a sure thing that even more changes will be coming!

Gene Mundt

I am a 30+ year veteran of the mortgage/banking industry, with extensive knowledge and experience in mortgage and credit services, management, and real estate appraising. I am also an IL Certified Financial Planner. This unique combination of education, experience, and expertise affords me more complete and in-depth resources from which to service my clients and their needs.

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Comments

  1. Since Los Angeles and Orange counties are considered high cost area there is a third type of loan.
    Loans between $417,000 and $625,500 are called high balance loans. While the interest rate is a little higher than for conforming loans (to $417000) you can get loans backed by Fannie Mae and Freddie Mac. FHA however recently dropped their limit to $417000.

  2. Good to know, Maya.

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