Faltering help for high-dollar borrowers

There is one other structural issue - large loans tend to get paid off more quickly than smaller loans, so investors want a premium for that. So even risk aside jmbos will trade higher than conforming loans, all things being equal.

People have to be pretty well off in order to afford a jumbo loan. Why do they need to be given even more government hand-outs by making jumbo loans more affordable? Welfare for the rich is just plain wrong. Let's roll the conforming loan limit back down to $417K.

We'll see how aggressive the lenders step up when they originate these loans. I financed $500K of a $629K purchase last summer with a 6.125% 10/1 ARM. I'll be interested to see if I can get into a fixed-rate for under that rate without paying points or closing.

Why on earth is a 7.5% interest rate for a jumbo loan "absurd?" You must be too young to remember the historical norms for mortgage rates.

Nobody is entitled to a jumbo loan at cheap rates. We are facing a global financial meltdown precisely because investors mispriced risk far, far too cheaply. It's a good thing they are cautious about lending huge sums of money secured by declining assets.

You should also understand that jumbo loans carry risks other than credit risk. Because of their size, they are much more sensitive to interest rates and prepayment risk. They do not perform the same way as "true" conforming loans, so they will never be treated the same, as fungible, vanilla, no-brainer investments.

The era of entitlement is over.

Marcus,

Thanks for your comments. The absurdity isn't the absolute price. It's the relative price -- the gap between rates on conforming and jumbo loans. All available data shows that default rates on jumbo loans closely approximate the low default rates on conforming loans. Rates should reflect risk. Right now, they don't.

He isn't giving you enough credit, Mr Reporter. He obviously hasn't checked out wikipedia.org for your bio.

Wow, not many conservatives on this post. I am building a house, and need a non conforming jumbo loan. My wife and I are both physicians and have paid our way through medical school. I graduated from high school in 1991 and have since gone through undergrad, medical school and 8 years of additional medical training. I am come from a very poor family as does my wife and we are both sick to death of people trying to level the playing field. No one is saying give rich people a hand out. What we are saying is allow us to borrow money on the terms of our credit worthiness. Jumbo loans, likely are a better credit risk than conforming loans if given to people that can afford them.

As I said, Binyamin, it isn't all about credit risk. Jumbo loans do not perform the same under different market conditions as true conforming loans. Investors are not going to take on those added risks for free.

Binyamin, I made the same comment as Marcus up above - there are non credit risk reasons for jumbos to be more expensive, and nothing is being done to alter that.

Marcus and Charles,

While there are certainly reasons for jumbos to be more expensive, and jumbos always have been more expensive, the basic concern at present is about the increased differential between the cost of a conforming loan and the cost of a jumbo loan. The gap, in other words, is getting bigger.

While I am aware of the reasons for a gap, I am not aware of reasons for a widening gap -- except for irrational behavior.

I'd welcome your thoughts on other reasons why a jumbo loan should be relatively more expensive today than it was last year.

The difference is because loans are considered much riskier now. Conforming loans (which are sold to Freddie Mac or Fannie Mae, right?) are artificially insulated from risk, so they have always always been priced lower (i.e. have lower rates) than Jumbo loans. In the past, the risk was considered low, so the difference was small. Now the risk is considered high, so the difference in cost is high.

I believe you are looking at the pricing backwards. The rate for a Jumbo is what the current market rate for a loan should be, and the conforming rate is artificially low.

The high yields on jumbos reflect not only the price of credit risk. They reflect the price of uncertainty.

First, how is an investor to assess creditworthiness today? Use the rating agencies? Har har. Credit insurer Ambac is looking at four to eight times expected losses on collateral rated as high as Alt-A. Unless an investor is brain damaged, he now realizes that he has very little reliable information about creditworthiness outside of GSE-backed securities. Would you invest in a black box without expecting to be paid extra for it?

Second, you still have the negative convexity of MBS, which is much worse for jumbos. Negative convexity always adds uncertainty, and frankly, now is not the time investors are looking for one more thing that's hard to understand. Which is why the jumbos-lite were DOA.