Jumbo conforming loans eligible for purchase by Fannie Mae and Freddie Mac are now available at nearly the same interest rate as conventional, conforming loans, executives at the companies told lawmakers this week.
But the credit crunch is keeping rates elevated on jumbo loans Fannie and Freddie can’t buy, and the government-chartered companies could lose their ability to buy mortgages above the $417,000 conforming loan limit at the end of the year if Congress doesn’t act.
The House Financial Services Committee held a hearing Thursday that was prompted by concerns that rates on jumbo loans remained elevated after Congress and President Bush approved a temporary increase in the conforming loan limit in February.
The increase allows Fannie and Freddie to purchase or guarantee so-called jumbo conforming mortgages equal to 125 percent of the conforming loan limit in 224 high-cost areas until the end of the year, up to a maximum of $729,750.
Tom Lund, executive vice president single-family mortgage business at Fannie Mae, said the company began accepting jumbo conforming loans within 30 days of HUD’s publication of the list of 224 eligible high-cost metropolitan statistical areas on March 6.
But six weeks later, Fannie has purchased or guaranteed only "a relatively small number" of jumbo conforming loans over the old $417,000 limit, Lund said in his prepared testimony.
One reason is that Fannie Mae and its lender partners needed to implement new policies and procedures. There is also a lag of 30 to 120 days to between the time a loan application comes in and it is closed and delivered to the secondary market, Lund said.
Jumbo loans are also not eligible for trading in the "to-be-announced," or TBA market, Lund said. The TBA market is "extremely efficient and liquid," he said, because lenders can fund a conventional, conforming loan and know with "absolute certainty" that it can be securitized and sold to Fannie or Freddie.
When the Securities Industry and Financial Markets Association excluded jumbo conforming loans from TBA-eligible pools, lenders were reluctant to make jumbo conforming loans at rates comparable to conforming loans, Lund said. Lenders weren’t sure how the loans would go over with secondary market investors and demanded higher fees and pricing to cover the extra costs and risks, Lund said.
On May 6, Fannie Mae announced that for the remainder of the year it would purchase jumbo-conforming loans to hold in the company’s investment portfolio and price them as if they were conventional, conforming loans.
At the height of the credit crunch, rates on jumbo loans were as much as 1.25 percent higher than standard conforming loans. Since the May 6 announcement, rates on jumbo-conforming loans (up to $729,750) have come down to the point where they are equal or just above rates on standard conforming loans ($417,000 or less), Lund said. For a borrower with a $700,000 loan, that translates into a $400 reduction in the monthly mortgage payment.
Lund said Fannie Mae’s pipeline for future delivery of jumbo conforming loans has grown rapidly. But the new jumbo conforming loan limit is set to expire at the end of the year, which could present "a major hindrance to the development of an efficient, liquid market for jumbo-conforming loans," Lund said.
"A window of seven months is not enough time to create an asset class with the liquidity and scope that traditional conforming mortgages enjoy," Lund said. "A permanent high-cost-area loan limit would, we believe, be an extremely powerful market incentive for the mortgage industry and secondary market investors to make these loans more widely available and affordable for consumers."
Although the House has approved legislation that would make the increase permanent as part of an overhaul of oversight of the government-sponsored entities, or GSEs, the Senate is mulling a lower ceiling of $550,000 in the latest version of its GSE reform bill.
Patricia Cook, executive vice president and chief business officer at Freddie Mac, said Freddie announced credit terms and pricing on conforming jumbo loans six days after HUD identified eligible markets. In early April, Freddie entered into commitments with several customers to buy portfolios of existing conforming jumbo mortgages, she said.
On April 17, Freddie Mac announced it expected to buy $10 billion to $15 billion of "agency jumbo" mortgages by the end of the year. It wasn’t long before rates some lenders were offering in March on jumbo conforming mortgages dropped as much as three-quarters of a percent, Cook said.
"Now, many lenders are able to offer rates on high-quality agency jumbo mortgages that are a full percent less than other jumbos, and only about 20 basis points above non-jumbos," Cook said. "We expect this pricing will be the market norm for the agency jumbo mortgages through the end of the year."
Rates on jumbo mortgages not eligible for purchase by Fannie and Freddie will probably continue to be much higher, Cook said — if they are available at all.
Freddie buys only fixed-rate agency jumbo mortgages and certain conservative hybrid adjustable-rate mortgage (ARM) loans, Cooks said, and borrowers have to document their income and assets. Maximum loan-to-value ratio is 90 percent of current appraised value, and borrowers must be deemed creditworthy.
Because rate surveys have not been distinguishing between agency-eligible and non-agency-eligible loans, the lower rates on agency jumbo loans may have gone largely unnoticed until recently, Cook said.
Testifying on behalf of the National Association of Realtors, broker-owner Vince Malta of San Francisco-based Malta & Co. Inc. urged lawmakers to make the temporary jumbo conforming loan limit — which allows Fannie and Freddie to purchase or guarantee mortgages up to 125 percent of the median home price up to $729,750 — permanent.
NAR estimates the move would generate 300,000 to 350,000 additional home sales per year, reduce housing inventories by one to 1.5 months, and save consumers who get a jumbo conforming loan $300 to $600 per month, Malta said. NAR Chief Economist Lawrence Yun said he thinks making the higher limits permanent could prevent 140,000 to 210,000 foreclosures a year by helping more than 500,000 borrowers with mortgages above the $417,000 conforming loan limit refinance at lower interest rates.
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