SeattlePi.com Staff
July 2, 2009
Brian and Sue McGee started looking to refinance their Maple Valley home last year because they wanted to move from their adjustable-rate mortgage to one fixed at current low rates.
"We were waiting for something to get into the 5 percent range," Brian McGee said last week.
The only problem was, rates on mortgages of the size they needed weren't quite so low. That's because their loan was above the $417,000 cap on the conforming loans that federally owned mortgage giants Fannie Mae and Freddie Mac will buy or guarantee.
While, so-called "jumbo" loans above the limit traditionally carry higher rates, Congress tried last year to narrow the gap for certain mortgages in high-cost areas by raising the cap to 125 percent of an area's median home price, up to $729,750.
The rates for this new category -- known as "jumbo conforming," among other names -- have only recently come close to those for standard conforming loans.
Here's a quick version of the short-but-complicated history of jumbo conforming loans.
Congress initially raised the conforming loan limit to 125 percent of a median home price in high-cost areas -- making the cap $567,500 in King County -- in March 2008 as a temporary measure through the end of that year.
But security traders decided the larger mortgages could not go in loan pools that are key to the secondary mortgage market. This meant the loans ended up in a their own, new category, rather than being just like any other conforming loan, and drew higher interest rates and more stringent restrictions.
One explanation for security traders' reticence to treat these like other conforming loans was that the higher limit was temporary. That's one reason why Congress eventually declared the increase "permanent," but only to 115 percent of median home price in high cost areas, up to cap of $625,500, starting in January. This put the cap at $506,000 in King County.
But security traders still wouldn't allow mortgage pools to have more than 10 percent of their value in the jumbo conforming loans, so rates remained notably higher.
Adding to the confusion, February's federal stimulus package raised the cap back to last year's temporary limit for the rest of 2009, although Fannie and Freddie didn't start buying mortgages up to the higher limit until May 4.
Rich Bennion, executive vice president of HomeStreet Bank, said the gap between rates on jumbo conforming and standard conforming mortgages has dropped from as much as 1.5 percentage points to around 0ne-quarter of a point in the past few months. A big reason for this is that Fannie Mae, which HomeStreet sells loans to, has started buying these mortgages individually, he said.
As a result, he said, HomeStreet's activity in conforming jumbo loans has quadrupled since mid March.
Greg McBride, senior financial analyst at Bankrate.com, also has noted that the rate spread has narrowed as extra restrictions eased for jumbo conforming loans since last fall.
"Borrowers can get a more competitive rate. That's a help to housing markets where home prices are higher than the national average," McBride said. "The lingering question is whether this is going to continue past 2009 and in what form."
Dick Lepre, senior loan officer at Residential Pacific Mortgage, in San Francisco, said jumbo conforming rates started getting attractive a few months ago, but only occasionally.
"It would be good for about a half a day out of every two weeks," he said. "Now what we see is sort of a uniformity to the difference between jumbo conforming and conforming."
Lepre said he didn't really understand why there should be any difference.
"Are these big mortgages inherently any riskier than $417,000 mortgages? I don't think so," he said. "The same underwriting standards are in place."
That said, Lepre didn't think eliminating the gap would make much difference to housing markets.
"It will support slightly higher real estate prices in places like San Francisco, L.A.," he said, "but not massively."
The narrowing of the gap did make a difference for the McGees, allowing them to close on a 30-year mortgage fixed at 5 percent in May.
"I'm real happy," Brian McGee said. "It just gives us a lot more comfort knowing that, no matter what happens with our economy, our rate is going to be fixed, and we're not going to have to fight with escalating interest rates in the future."
For link to article, visit http://www.seattlepi.com/local/407821_mortgage03.html
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