September 5, 2013
As Mortgage Rates Tick Up, Discount For Borrowing More Grows
Having ticked down to 4.51 percent last week, the average rate for a conforming 30-year mortgage has ticked back up to 4.57 percent versus 3.55 percent at the same time last September, within one basis point of last month’s 4.58 percent rate which was the highest average rate in over two years.
As the advertised rate for a conforming 30-year loan at Wells Fargo has ticked up to 4.875 percent, the rate for a Jumbo 30-year loan of over $625,500 in San Francisco has only ticked up to 4.625 percent and the discount for a Jumbo loan has widened to 0.25 percentage points versus a historical premium for the larger non-conforming loans.
∙ Mortgage Rates up on Signs of Stronger Economic Recovery [Freddie Mac]
∙ Spike In Sales Due To, Rather Than Despite, A Spike In Rates [SocketSite]
∙ Premium For Going Big Is On The Decline, Cheaper In Some Cases [SocketSite]
First Published: September 5, 2013 8:30 AM
Comments from "Plugged In" Readers
Well, either bankers are asleep at the wheel or this is a sign of fundamental split between mortgage markets:
- On one side the hoi polloi that has a regular income, modest savings and has a job that is subject to global wage arbitrage (in short, someone cheaper somewhere else can do it). They have a higher chance at "job turnover" or even loss of income.
- On the other side, the lucky few with sufficient capital, an edge on the job market (knowledge workers) and that chooses to borrow as a way to diversify risk. These are less likely to default from the bank's point of view.
In French, they say "on ne prete qu'aux riches" which can be translated into "only the rich can borrow". More and more true these days.
Posted by: lol at September 5, 2013 8:54 AM
On the contrary I think it reflects higher demand for entry-level homes as the lower-end buyers re-enter the housing market in droves. Its a sign of strong, nationwide support for this recovery at the low end of the market.
Posted by: Jimmy (No Longer Bitter) at September 5, 2013 9:08 AM
true, but the mortgage market is a balance between making business and managing risk. Lower rates for higher borrowers can either mean that they want to attract wealthy customers or that they consider them such a low risk that they're giving them better rates. I'd vote for the latter.
Posted by: lol at September 5, 2013 9:12 AM
That, or demand is simply weaker at the high end and there is a surplus of funding chasing too few wealthy buyers ... driving down rates.
Posted by: Jimmy (No Longer Bitter) at September 5, 2013 9:16 AM
true. In any case it is a good time to be wealthy (always is).
Partly related, I am currently shopping for property in FR as I had said a while ago. Everyone here complains people cannot borrow, and this caused some pretty interesting local corrections (even on the Mediterranean). The 2 banks I do business with are giving me great deals (3% on 20-y fixed). Customers with decent incomes (even foreign earned) and enough net worth have absolutely no problem borrowing. Good times.
Posted by: lol at September 5, 2013 9:39 AM
There was a front page article in today's Wall Street Journal regarding the unprecidented negative spread between the conforming and jumbo loan rates. Quick summary is that the fees increased on the conforming loans (which are being passed on as higher rates) plus the Freddie/Fannie bond yields increasing is driving rates on conforming loans yet for jumbos, the banks have so much money to lend and their costs of funds are so low, that the cost (ie rate) of jumbo loans is staying low for those with the best credit and plenty of assets.
Posted by: Rillion at September 5, 2013 10:14 AM
I'm curious about the terms to get the "published" Wells Fargo jumbo rate. When we bought our place last year, we took out a jumbo loan from WF - 3.7% back then (with negative .5 points!). but that was available only if we put 35% or more down, and we had to have a meticulously verified high income and high assets to qualify for any jumbo loan at all. At a lower down % than that, the rate rose, and at 20% down, it jumped by 70bps to 4.4%. Makes sense as the default risk is so much lower with a higher down payment. WF sells the loans (my firm helps to repackage them into securities) so a lot of what they offer is driven by what investors will by. They may have loosened up on the down payment and other income requirements as the housing market has recovered, but I really don't know.
Posted by: anon at September 5, 2013 12:31 PM
In any case it is a good time to be wealthy (always is).
That is until the time comes when you're met at your door by a representative of the Comité de salut public.
Posted by: Brahma (incensed renter) at September 5, 2013 10:33 PM
"a surplus of funding chasing too few wealthy buyers"
That doesn't make much sense. The banks have a bunch of money that can only be lent to wealthy people, but the vault marked "Loans for Poors" is running low? Last I heard, money was fungible. If they have a surplus of money (which I think it's safe to say our banks do), why would that automatically mean discounts for jumbo loans? I'm more inclined to believe the "wealthy people are so much lower risk" hypothesis.
Posted by: Daniel at September 6, 2013 7:49 AM
If you understood underwriting, my statement would make a lot of sense. It means that private money is available for low risk borrowers, but high risk borrowers have to rely on government-subsidized markets for their borrowing.
Posted by: Jimmy (No Longer Bitter) at September 6, 2013 8:35 AM
"Federal officials are preparing to reduce the maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac, a move that is likely to face resistance from some lawmakers in Congress and the real estate industry."
"The Federal Housing Finance Agency, which regulates Fannie and Freddie, hasn't announced how far it will drop the loan limits, which would take effect Jan. 1, 2014, and a spokeswoman declined to elaborate on specifics. But in a statement, the agency said a "gradual reduction in loan limits is an appropriate and effective approach to reducing taxpayers' mortgage-risk exposure…and expanding the role of private capital in mortgage finance."
Posted by: Eh-Non at September 9, 2013 11:37 AM
Hopefully the government's further withdrawal from the mortgage market will afford yet more borrowers reduced mortgage rates as we now see with jumbo loans being cheaper than conforming.
Posted by: Jimmy (No Longer Bitter) at September 9, 2013 12:09 PM
Uh, huh. From yesterday, Fuzzy credit:
But Levine…failed to ask the most obvious question: are jumbo mortgage rates, in actual fact, lower than the rates on conforming mortgages? It certainly looks that way, in the WSJ article. But then I got a very interesting email from…mortgage-rate information service HSH.com.
The WSJ…cites some data about the spread between the two rates from HSH, but his chart uses information from the Mortgage Bankers Association. And…if [The WSJ] just stuck to HSH data throughout, the spread would never have turned negative.
Part of the problem is that there’s no such thing as a simple, commodity mortgage. These things are all pretty complex beasts, and most of them include the borrower paying “points” up front, which need to be converted into percentage points using a rule of thumb like four “points” = 1 percentage point. According to HSH’s data, jumbo mortgage rates were actually closer to 4.86% last week, a full 15 basis points more than the WSJ’s 4.71% figure.
…use a different dataset, and you don’t see the crossover phenomenon at all. Gumbinger has a few ideas about why the MBA’s data might be such an outlier; one reason, he says, is that the MBA counts all mortgages of more than $417,000 as jumbo mortgages, even when they’re in markets like New York and Los Angeles where mortgages can be conforming when they’re as large as $625,500.
Emphasis mine. Go read the whole thing.
I don't have any expertise in underwriting, but the idea that GSE withdrawal from the mortgage market is going to entice more private capital into it, to the point that mortgage rates go down is pretty far fetched, IMHO.
Posted by: Brahma (incensed renter) at September 9, 2013 12:47 PM
"Hopefully the government's further withdrawal from the mortgage market will afford yet more borrowers reduced mortgage rates as we now see with jumbo loans being cheaper than conforming.
Even with the increased fees that Rillion posted about the government is still subsidizing rates so I think they'll be higher if the government does withdraw.
I think this jumbo/conforming rate spread is evidence of what I posted before. That the recovery has been mainly for higher end incomes/homes. Many of the low end jobs added in the recovery have been temporary/low wage. The gap in creditworthiness between rich and poor has increased. Also, I think high end homes are much more likely to do well in the future. So high end homes make much better collateral these days than homes on the low end.
Posted by: anonZ at September 9, 2013 12:56 PM