NEW YORK – Aug. 21, 2013 – The summer of 2013 has seen a new kind of blockbuster that could be titled: “Honey, I Shrunk the Jumbo Rate.”
The spread between average rates for jumbo loans and government-backed conforming loans is the narrowest in five years – even with the recent rise in interest rates.
“Our jumbo and conforming rates are neck-and-neck, both on the fixed and the ARM,” said Cyndee Kendall, a Bank of the West senior vice president in the San Francisco Bay Area. “There’s next to no difference between the two.”
The average rate for a 30-year fixed-rate jumbo was 4.69 percent on Aug. 9, compared with 4.51 percent for a 30-year fixed-rate conforming loan, according to HSH.com, which tracks rate trends. Lender enthusiasm for jumbos has generated a 20 percent rise in origination volume just from the first to second quarter of 2013. And by year’s end, volume is expected to hit $220 billion, according to Inside Mortgage Finance, which covers the industry.
Improving bank balance sheets and the rebounding real-estate market have spurred lenders to originate more jumbos to qualified borrowers. The loans bring in revenue when held on the lenders’ books, and are also profitable when they are bundled and sold as securities in the secondary market. That could mean some great deals for jumbo borrowers, defined as those needing loans for more than $417,000 in most places or $625,500 in some high-price markets.
In fact, some lenders are offering jumbo rates that are lower than conforming loans. This summer, Wells Fargo has made some jumbo loans at rates .25 percent lower than its conforming products, said Brad Blackwell, executive vice president of Wells Fargo Home Mortgage. “It’s the first time I have seen an inversion in rates in my 30-year career,” he added. “It’s been close, but generally the rule of thumb has been that rates for jumbo mortgages have been roughly a quarter percentage [point] higher than conforming-loan rates.”
For much of the spring and summer, the jumbo-conforming gap has been less than 20 basis points for a 30-year fixed-rate mortgage and even tighter for five-, seven- and 10-year adjustable-rate mortgages, said Keith Gumbinger, vice president of HSH.com. In December 2008 – the height of the mortgage crisis – the gap between rates for a 30-year fixed-rate jumbo and a government-backed loan rocketed to 180 basis points, Gumbinger said.
Currently, the best rates may come from bigger lenders that use jumbo loans as a relationship-builder to attract high-net-worth customers, said Mathew Carson, a mortgage broker at San Francisco-based First Capital Group.
However, even with competitive rates, borrowers straddling jumbo thresholds may opt for conforming loans because of the stricter lender guidelines to qualify for a jumbo, Carson added. For example, jumbo loans typically require a downpayment of at least 20 percent of the loan value – and higher percentages as the loan value increases. Fannie Mae, however, may need only 10 percent down or less.
“I see a lot of people who have good salaries with Google or other technology companies but haven’t worked there long enough to have established savings or aren’t good savers,” Carson said.
In early July, he matched one Bay Area borrower to a jumbo 30-year fixed-rate mortgage at a rate three-eighths of a percentage point below the Fannie Mae rate, but that borrower had a stellar credit score of 800, he said.
More factors to consider when deciding between a jumbo and a conforming loan:
• Great credit histories. Borrowers with scores as low as 660 may be able to qualify for a jumbo loan at Bank of the West, but to receive the best rates, a score above 720 and preferably as high as 780 is desirable, Kendall said.
• More reserves. Fannie Mae and Freddie Mac loans usually require a borrower to set aside at least two months of mortgage payments. However, since jumbo monthly payments are much higher, lenders may stipulate nine to even 36 months of reserves, depending on the loan amount.
• Leverage relationships. To qualify for its best jumbo rates, Wells Fargo, for example, requires borrowers to have a checking account with the bank and make automated mortgage payments from it, Blackwell said. Borrowers who have more than $1 million in the bank may receive additional discounts, he added.
Copyright © 2013 Dow Jones & Company, Inc., Anya Martin.
