The Veridian Blog

Hello everyone,

Wholesale lenders began accepting applications for the long-awaited “Jumbo-Conforming” loan amounts in mid-March. The success of this new guideline, however, has unfortunately fallen far short of the anticipated economic impact on the refinance market. There are now three distinct tiers of rates available to homeowners: 1) traditional conforming rates for loan amounts $417,000 or less; 2) 2008 temporary Jumbo-Conforming rates for loan amounts between $417,000 and $729,750, and 3) traditional Jumbo rates for loans in excess of $729,750. While brokers definitely expected an add-on in fee or price for loans in the middle tiered range, no one expected the additional cost to be as much as it is.  The rates disappointed throngs of borrowers waiting to refinance their once-Jumbo mortgage rates. The rates have in fact been closer to the traditional Jumbo variety than the traditional Conforming programs.

Why are the Jumbo-Conforming rates so high? The issue is once again liquidity in the secondary market. There’s not much that wholesalers can do if no one is purchasing their funded loans. The spread between mortgage rates and the traditional benchmark market indexes (ie. 10-year note) are at an all-time high. In other words, there isn’t much economic data to substantiate the artificially high rates lenders are charging. This translates into a good news/bad news situation. In all likelihood, rates will fall down once investors start investing again and in the normal course of a competitive capital market prices fall. It’s also understandable to feel apprehensive about this situation because we do not know how deep the liquidity problem is and how long it will take to get straightened out. There will almost certainly be a sizeable level of mortgage reform before the secondary market is functioning properly - whether that happens before the end of 2008 remains to be seen.

Richard