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Jumbo Mortgages No Longer the Cheapest Rate in Town

A jumbo mortgage – one that’s larger than Fannie Mae or Freddie Mac will later buy – presents a higher risk to lenders. Before the pandemic, banks considered these buyers more reliable and their rates were low, but the market now favors lower-loan borrowers.

NEW YORK – According to Bankrate.com, the average rate on a 30-year jumbo mortgage hit 3.77% in mid-July – more than 0.4 percentage points above the average rate on smaller, conforming loans.

That’s a switch from convention vs. non-conventional (jumbo) mortgage rates before the pandemic hit. From mid-2015 until this spring, jumbo rates were consistently lower than, or equal to, the rates on conforming loans.

In recent years, banks have favored jumbo mortgages for their relatively low risk level, since jumbo borrowers tend to be wealthier. In March, however, the Federal Reserve agreed to buy an essentially unlimited amount of mortgage-backed securities.

“The loans that get made are those that have a ready buyer for them,” says Greg McBride, chief financial analyst at Bankrate.com. “Government-backed loans are really the only game in town.” If a lender knows that Fannie Mae or Freddie Mac will buy a conventional loan, it represents less risk. If they must keep that loan or find a non-government buyer, it represents higher risk.

In addition, jumbo loans aren’t entitled to forbearance under the CARES Act, which allows homeowners to request up to 12 months of postponed mortgage payments. However, private lenders may offer some type of forbearance option of their own.

As a result, the share of jumbo loans in forbearance stood at 10.2% in mid-July – higher than the 7.8% rate among all mortgages, according to Black Knight Inc. Some banks might be quick to grant relief on jumbo loans since they’re often holding those loans rather than selling them to investors, which leaves the banks more exposed if the loans go bad.

Lenders have been raising credit standards for all sorts of loans since the coronavirus hit, ensuring that only the upper echelon of potential buyers could access jumbo credit. Applications for loans of at least $625,000 filed in May were down about 5% from the same time last year, according to the Mortgage Bankers Association.

Beyond the influence of the pandemic, though, jumbo-loan originations were already fluctuating. They reached $80 billion in the first quarter of 2020 – down about 22% from late 2019 but up 25% from the same time last year, said Inside Mortgage Finance.

Source: Wall Street Journal (07/27/20) McCaffery, Orla

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