August 17, 2010 – As the government seeks to revive the real estate market, mortgage interest rates continue to fall. Interest rates dipped this week to a new record low in over fifty years. As of this writing, the interest rate on 30 year fixed rate conforming loans is 4.00% and 5.00% on jumbo loans. Jumbo loans are mortgage loan amounts that exceed $417,000 for most of the continental U.S.
Historically, jumbo mortgage rates were higher than conforming loan rates due to their considerable riskiness. But, recent developments in the mortgage lending business have made jumbo mortgage loans more attractive to banks and borrowers.
In order to avoid a government take-over, banks are motivated to provide more options to borrowers by way of jumbo mortgages. President Barack Obama signed new financial reform legislation last month, the Dodd-Frank Act, which permits the Federal Deposit Insurance Corporation (FDIC) to dismantle any financial institutions deemed “systemically risky,” forces banks to increase capital reserves, and enforces these regulations via a new consumer financial protection bureau.
In comparison to non-conforming jumbo loans, FHA-insured loans cost more. The annual percentage rate of an FHA-insured loan is 5.178 percent, whereas the APR of a jumbo loan is 5.098 percent. This year the Federal Housing Administration has reduced allotted seller concessions, increased down payment requirements, and increased mortgage insurance premiums. The FHA is floundering about for liquid assets because an audit revealed that capital reserves dipped to 0.53 percent, which Congress has mandated cannot be less than 2 percent. The FHA Commissioner, David Stevens, reported that the FHA seeks to decrease its market share by making it more difficult to qualify for FHA loans.
In comparison to non-conforming jumbo loans, FHA-insured loans cost more. The annual percentage rate of an FHA-insured loan is 5.178 percent, whereas the APR of a jumbo loan is 5.098 percent. This year the Federal Housing Administration has reduced allotted seller concessions, increased down payment requirements, and increased mortgage insurance premiums. The FHA is floundering about for liquid assets because an audit revealed that capital reserves dipped to 0.53 percent, which Congress has mandated cannot be less than 2 percent. The FHA Commissioner, David Stevens, reported that the FHA seeks to decrease its market share by making it more difficult to qualify for FHA loans.
Big banks, such as J.P. Morgan Chase, Citibank, and Wells Fargo, are capitalizing on these recent developments by expanding jumbo lending practices. Some banks offer jumbo loans for as low as 10% down, 65 percent LTV, and $10 million mortgages. Jumbo loans are less risky because default rates are relatively low as most banks require a credit score above 680.
Of seven major housing markets, Redfin Corp. reports that less than half of active listings in 2009 resulted in sales. But, the aggressive pursuit of jumbo mortgages loans has provided a much needed boost in the luxury housing market. Pending sales in the luxury housing market is the only pricing category that increased in the past month. According to National Association of Realtors spokesman, Walter Maloney, the sales volume for homes over $1 million is up more than 35 percent from this time last year and homes between $700,000 and $1 million is up by 29 percent over last year. Maloney attributes these increases to the recent affordability and availability of jumbo mortgage loans.
The government could feasible put a wrench into the positive movement of jumbo loans by way of the Dodd-Frank Act. Just released Monday, the Federal Reserve Board is proposing a revision of escrow account requirements for first-lien jumbo loans. In order to determine whether a lender ought to establish an escrow account for property taxes and insurance, an APR threshold of 1.5 percentage points is currently applied. The Fed will increase the APR limit to 2.5 percentage points.
Although it is tough to determine how low interest rates will go, it is reasonable to assume that a rate increase will hurt the housing market. As unemployment grazes double digits and Fannie and Freddie file for additional government bailouts, a double-dip in the housing market is not in the best interest of the current administration and definitely not beneficial for Americans.
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