Balancing Risk with Affordable Financing:
Lower Loan Limits & Higher Costs of Borrowing
An interesting phenomenon is taking place within the financing world these days ...
What "used" to be ... doesn't "remain that way" long!
This has always been the case in quickly-changing JUMBO financing. JUMBO loans are defined as those loans above $417,000 on Single-Family Residences (except in those areas considered as more high cost* (*See me for more info).
JUMBO loans are typically financed through:
- Private Lenders
- Equity firms, security companies, etc.
There is NO government agency backing for JUMBO loans, should they go bad ... i.e., there is no Fannie Mae, Freddie Mac, or FHA to "absorb" the loss.
So why are JUMBO loans becoming less of a risk? And why are they enjoying Interest Rates often lower than those found on other loans?
The Answer: Competition! These days competition exists amongst lenders for solid, performing loans. Also a big factor ... there is less intervention from Agencies on JUMBO loans and fewer rules and fees are being applied during their financing.
During the last remaining months of 2013, Interest Rates on normal "conforming" loans (conforming meaning loans sold to Fannie/Freddie) had increased sharply, while Interest Rates on JUMBO loans remained relatively unchanged.
Again ... why? JUMBO Interest Rates are less influenced by "trading" of bonds, treasuries, and mortgage-backed securities. They are more influenced by banks' "costs of money", and those costs have remained consistently low during these times of "Fed Intervention" and zero borrowing costs.
The spread at which JUMBO loans ... or what is considered as "generally sound" loans ... are made, remains profitable. At the same time, JUMBOs earn banks lending on them, a "good mark" from Regulators, which in turn encourages the banks to minimize their risks even further. JUMBO loans are often made on Adjustable Rate Mortgage (ARM) terms ... so banks/lenders are not left holding a large loan at historically-low interest rates for longer terms.
Some experts are now saying that the new Director of the Federal Housing Financing Agency (FHFA), Mel Watt, will delay the implementation of the Guarantee Fee and risk-based pricing plan. He'll do so, at minimum, until he has had a chance to fully evaluate the proposed hikes in borrowing and the impact they'll cause on the industry and the housing recovery.
The net effect impact on borrowing/mortgage loans is often seen quoted by those same experts as 4/10ths (.40) percent ... or nearly a half percent higher Interest Rates ... or corresponding higher costs for borrowing at lower rates.
Balancing Risk with Affordable Financing: Lower Loan Limits & Higher Costs of Borrowing ...
Bottom line? Don't look for lower Interest Rates in the conforming everyday world soon. On the other hand, enjoy (and take advantage of) the exceptionally low, JUMBO Interest Rates seen currently.
And stay tuned ... it's a sure thing that even more changes will be coming!
I'm easily found at:
Mortgage Originator - NMLS #216987 - IL Lic. #031.0006220 - WI Lic. #216987
American Portfolio Mortgage Corp.
Gene Mundt, Mortgage Originator, an Originator with 40 years of mortgage experience, will offer you exemplary mortgage service and advice when seeking: Conventional, FHA, VA, Jumbo, USDA, and Portfolio Loans in Chicago and the greater Chicagoland region, including: The Lincoln-Way Area, Will County, (New Lenox, Frankfort, Mokena, Manhattan, Joliet, Shorewood, Crest Hill, Plainfield, Bolingbrook, Romeoville, Naperville, etc.), DuPage County, the City of Chicago, Cook County, and elsewhere within IL & WI.