NEW YORK–While the mortgage markets continue to see record low interest rates, one segment of the market has seen something of a reversal.
According to an analysis by Bankrate.com, the average rate on a 30-year jumbo mortgage was 3.77% in mid-July, more than 0.4 percentage points above the average rate on smaller, conforming loans. From mid-2015 until this spring, jumbo rates had been consistently lower than or equal to the rates on conforming loans, the company said.
“The reversal is just one of the ways the coronavirus crisis has wreaked havoc on the mortgage market,” noted the Wall Street Journal in its analysis. “The same force pushing most mortgage rates to record lows--investors piling into safe-haven assets like government bonds—has pushed jumbo loans out of favor.”
Bankrate.com said in most markets a jumbo loan must be larger than $510,400 this year, but in the highest-cost areas it must be larger than $765,600.
‘Extraordinary Steps’
“In recent years, banks have favored jumbo mortgages for their relatively low risk level, since jumbo borrowers tend to be wealthier. Banks generally keep jumbo loans on their own books, betting that the borrowers are less likely to default,” said the Journal. “But the Federal Reserve has taken extraordinary steps to intervene in the mortgage market during the coronavirus pandemic, including agreeing in March to buy an essentially unlimited amount of mortgage-backed securities.”
“The loans that get made are those that have a ready buyer for them,” said Greg McBride, chief financial analyst at Bankrate.com told the Journal. “Government-backed loans are really the only game in town.”
Moreover, jumbo loans aren’t entitled to forbearance under the CARES Act, giving the servicer more of an opportunity to say no.
“Still, mortgage companies seem to be saying yes. The share of jumbo loans in forbearance stood at 10.2% in mid-July, higher than the 7.8% rate among all mortgages, according to mortgage-data firm Black Knight Inc.,” the Journal said. “Some banks might be quick to grant relief on jumbo loans since they are often holding those loans rather than selling them to investors, leaving the banks more exposed if the loans go bad.”
Decrease in Applications
Applications for loans of at least $625,000 filed in May were down about 5% from the same time last year, according to the Mortgage Bankers Association, the Journal reported. But there have been signs of life, with first quarter originations hitting $80 billion, down about 22% from late 2019 but up 25% from the same time last year, according to Inside Mortgage Finance.
But the recent activity doesn’t mean the spread between jumbo and conforming rates will narrow soon, McBride told the Journal. The gap lasted for about five years after the financial crisis.