Jumbo Loans May Offer Jumbo Rates

Conforming loan limits may have changed, but lenders are still treating jumbo loans like damaged goods.

If it walks like a jumbo and talks like a jumbo, then it must be a jumbo. That's the stance lenders are taking with loans in excess of $417,000, even though that's no longer the conforming loan limit.

The passage of the economic stimulus package has temporarily given Fannie Mae and Freddie Mac the ability to support mortgages up to $729,750 in size. Previously, the maximum conforming loan limit was $417,000; loans in excess of that amount were known as nonconforming jumbo loans. It was widely believed that increasing the jumbo mortgage amount would inject liquidity into the mortgage industry, bring down jumbo interest rates, and stimulate a much-needed turnaround.

Call them jumbos, price them as jumbos

Unfortunately, this change doesn't appear to have altered the way Freddie Mac and Fannie Mae price jumbo loans. Historically, these rates have run at least one percentage point higher than rates on smaller-sized mortgages, and that still appears to be the case. The change appears only to have added some new terminology for borrowers to absorb:

• Loans under $417,000, formerly known as conforming, are now being called traditional conforming or true conforming. Rates on these are hovering around 6.2 percent.
• Loans between $417,000 and $729,750 are now known as conforming jumbos; these are being priced at 7 percent or more.
• Loans larger than $729,750 are true jumbos. These carry the highest rates of all, typically in excess of 7.5 percent.

Too little, too late

So far, it looks like the additional temporary support from Fannie Mae and Freddie Mac isn't enough to entice lenders to take on these large, seemingly risky loans. Lenders are still reeling from losses related to months and months of loose underwriting practices.  They're worried about continued housing value declines, which make it tough to recover borrowed funds when loans go bad.

What's more, the liquidity of these big loans still remains questionable. Traditional conforming mortgages are eligible for trade on the to-be-announced (TBA) market, where investors can buy and sell mortgage-backed securities before they're even created. The new conforming jumbos, however, have been deemed ineligible for the TBA by the Securities Industry and Financial Markets Association. Many believe that the decision to keep conforming jumbos out of the TBA has kept the interest rates from dropping as expected.

Advice for would-be borrowers

Anyone searching for the lowest rate 30 year fixed jumbo, for example, should be prepared for a less-than-enthusiastic response from lenders. Despite the change in conforming loan limits, most lenders aren't underwriting these mortgages any differently than they had previously.  Borrowers can improve their prospects by having clean credit histories and sizeable down payments. Beyond that, shopping around is the only way to find the lowest rates available. For the time being, though, jumbos are still jumbos-no matter what's happened with the conforming loan limit.