Strong economic data and bank earnings reports led mortgage rates slightly higher and the Dow Jones Industrial Average above the 10,000 level for the first time since October 2008. Retail Sales declined 1.5%, but less than forecast after the cash-for-clunkers program expired in September. Sales excluding automobiles actually climbed 0.5%. Jobless Claims unexpectedly fall last week to their lowest level since January. Industrial Production improved, and the Empire State manufacturing index increased to the highest level since May 2004. JP Morgan Chase and Goldman Sachs reported 3rd quarter profits of $3.5 billion and $3 billion respectively. Citigroup posted a $101 million profit. And Bank of America announced they lost $1 billion, their second quarterly loss in less than a year. Currently the 30 Year Fixed sits at 4.625% (4.804% APR) and the 15 Year Fixed is at 4.250% (4.557% APR). This week, the Producer Pride Index inflation data and housing data will be most influential on mortgage rates.
A jumbo loan is any residential mortgage that conforms to Fannie Mae or Freddie Mac underwriting guidelines, but exceeds the conforming loan limit of $417,000. The 2008 economic stimulus package created a new jumbo-conforming program that was adopted by both Fannie and Freddie, allowing the agencies to purchase loan amounts up to the lesser of $729,750 or 125% of the median home value for a particular region (the jumbo-conforming loan limit for SLO county is $687,500). Since Fannie and Freddie only purchase loans with balances up to the conforming limits, and now jumbo-conforming limits, other investors, such as banks and insurance companies step in to create a market.
The “private label” residential mortgage-backed securities market has declined to a mere 20% of its volume from just 3 years ago. Only about 6% of loans are jumbo. And of those, half are jumbo-conforming from $417,001 up to $729,750, and the other half are $729,751 and higher. It appears the majority of jumbo loans are being put into banks’ portfolios. However, jumbo underwriting criteria for both credit and collateral continue to be very strict, with loan-to-value ratios not exceeding 70% or 75%, and even less for higher loan amounts, debt-to-income ratios below 40% or 45%, and significantly larger asset requirements.
Current jumbo rates are also not helping to revive this battered market. Rates on jumbo mortgages tend to run slightly higher than on a conforming loan due to the slightly higher risk to the investor. The typical spread or difference between conforming and jumbo interest rates tends to fluctuate between 0.250% and 0.500%. Spreads today are in excess of 1.250%.
The news is not all bad for high balance loans! Some relief is being offered through the jumbo-conforming loan program offered by Fannie and Freddie, with rates reflecting the more typical spreads. Time is running out, however, as the jumbo-conforming loan limits are temporary and set to expire on December 31st.
Central Coast Lending, Inc.