Dec. 24 (Bloomberg) -- Jumbo mortgage shoppers in the most expensive U.S. housing markets such as New York and San Francisco aren’t getting much relief from lower borrowing costs.
The average 30-year fixed rate for home loans of more than $729,750 remains almost 2 percentage points above conforming rates and the spread between them may set a record this month, according to financial data firm BanxQuote.
Banks remain reluctant to lend after recording $678 billion in mortgage-related losses and writedowns in the past year and as house prices plunge. The collapse of the private mortgage securities market means lenders find there’s little demand for jumbo loans they want to sell. If low conventional rates entice enough homeowners to refinance, jumbo home loans may become more affordable as loan payoffs add liquidity to the banking system, said Keith Gumbinger, vice president of mortgage-research firm HSH Associates Inc. in Pompton Plains, New Jersey.
“A guy in a low-cost market like Des Moines probably doesn’t care much about helping someone in New York buy a million-dollar apartment, but if he refinances his conventional loan, that’s exactly what he’ll be doing,” Gumbinger said. “He’ll be giving lenders the liquidity they need to rebalance their loan portfolios and compete for jumbo borrowers who typically are the best in terms of credit quality.”
The average 30-year fixed jumbo loan rate was 7.32 percent on Dec. 22, compared with 5.38 percent for a conforming loan, according to BanxQuote of White Plains, New York.
Wide Spread
The difference between the two averaged 2.13 percentage points in December, 10 times the spread from 2000 to 2006 and above last month’s 1.95 percentage points that was the highest on record. If current rates reflected the historical difference of 0.2 percentage points, jumbo borrowers with an $800,000 mortgage would save $913 a month.
Buyers in markets that rely on jumbo loans, such as New York, San Francisco, and Boston, may see rates fall in 2009 because of Federal Reserve Chairman Ben Bernanke’s plan to buy at least $500 billion of securities issued by Fannie Mae and Freddie Mac, said Gumbinger. Fannie Mae and Freddie Mac are the largest buyers of mortgage debt in the U.S.
The Fed’s mortgage-bond buying program, announced Nov. 25, also provides for the purchase of $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
Bernanke’s plan adds to previous government actions aimed at lower home-financing costs, including the September seizure of Fannie Mae and Freddie Mac. As part of that takeover, the Treasury announced its own program to buy mortgage-backed securities to bolster the worst housing market in at least 70 years.
Loan Applications Rise
Mortgage applications in the U.S. jumped 48 percent last week as dropping rates promoted a surge in refinancing. The average U.S. conforming rate for a 30-year fixed mortgage this week is 5.14 percent, the lowest in data that go back to 1971, Freddie Mac, the world’s second largest mortgage buyer after rival Fannie Mae, reported today. A year ago the rate was 6.17 percent, the McLean, Virginia-based company said.
The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan rose to 1,245.4, the highest since 2003, from 841.4 a week earlier. The group’s refinancing gauge rose 63 percent and purchases gained 11 percent.
While many homeowners are trying to lower their mortgage payments, buyers remain on the sidelines as prices fall.
The median U.S. home price plunged 13 percent in November from a year earlier, the largest drop on record and likely the biggest decline since the Great Depression of the 1930s, the National Association of Realtors said yesterday in a report.
Home Prices Tumble
Home prices are tumbling as foreclosure-related sales accounted for 45 percent of the month’s transactions, according to the Chicago-based trade group.
“The real elephant in the room is falling house prices,” Glenn Hubbard, former chairman of the Council of Economic Advisers under President George W. Bush who is now dean of the Columbia University Graduate Business School, said in an interview Dec. 22. “We can fix this by lowering mortgage interest rates.”
Declining prices won’t be helped by the Federal Housing Finance Agency’s announcement last month that it will lower the size of so-called expanded conforming mortgages that can be purchased by Fannie Mae and Freddie Mac. Congress authorized raising the conforming limit of $417,000 to as high as $729,750 in about 90 of the nation’s most expensive housing markets in 2008 as a temporary measure to support housing.
Average Rates
The average rate for loans that are above the national cap of $417,000 but within the limit set by Congress is 5.51 percent, compared with 5.20 percent for a standard conforming loan, according to a survey by HSH Associates.
On Jan. 1 that expanded cap drops to $625,500 following the formula set out by July’s Housing and Economic Recovery Act. The law, known as HERA, specified a loan limit of 115 percent of an area’s median home price, rather than the 125 percent limit approved for this year by Congress, said Andrew Leventis, an FHFA economist. The change means more buyers in high-priced areas will have to use jumbo mortgages, he said.
The Fed on Dec. 16 cut its benchmark interest rate target to a range of zero to 0.25 percent and said it will add to the announced $500 billion in mortgage bond purchases as needed.
“Over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities,” the policy makers said in a statement.
To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.
Last Updated: December 24, 2008 15:22 ESTsource:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aRAdEz_u_fR4&refer=home
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