ACTUAL CONVERSATION AT FANNIE MAE
Fannie Mae Bob: “Hi Mike, I just remembered we have no competition, so let’s charge a lot more…”
Fannie Mae Mike: “Hmmm, great idea, but what about Freddie Mac?”
Fannie Mae Bob: “Freddie always follows us, and we are so much bigger that we can do whatever we want anyway.”
Fannie Mae Mike: “Got it! Let’s jack those rates up now!”
OK – while that exact conversation may not have taken place, it is something that Fannie Mae is likely aware of and it is one of the reasons why conforming mortgage rates are so much HIGHER than jumbo rates right now.
WHY JUMBO RATES ARE SO MUCH LOWER
I actually blogged about Why Jumbo Rates Are So Much Lower Than Conforming Rates in April, and here are some of the other reasons: (1) Jumbo loans have stricter guidelines so they are less risky; (2) Jumbo loans have tighter appraisal requirements – again impacting risk; (3) Big banks that fund or buy jumbo loans are desperate for yield and will take what they can get; and (4) Jumbo lenders want to establish relationships with well-off borrowers and will fund loans at a loss in pursuit of those borrowers.
ALWAYS GO FOR JUMBO – IF YOU QUALIFY
Our conforming rates today (for loans backed by Fannie and Freddie) are about 5/8% to 7/8% percent HIGHER than our most competitive jumbo rates – depending on the loan amount and other qualifying factors.
So, borrowers should always pursue the best jumbo option – if it is available for them.
HOW TO TAKE ADVANTAGE OF JUMBO RATES
To take advantage of the best jumbo rates, borrowers must: (1) Have an actual jumbo loan amount – above $647,200 in Texas and above $970,800 in the Bay Area; and (2) Meet ALL of the more stringent qualifications with respect to down payments (20% or more), liquid reserves, debt ratios and credit. Caveat/reminder: many seemingly strong conforming borrowers do not meet the more stringent guidelines of our best jumbo investors. So, the lowest rate jumbo loans are not for everyone.
Some jumbo investors (who buy our loans) will allow borrowers to lock in jumbo rates even if the loan amount is NOT above the high balance limit of $822,375 but those investors do not offer the lowest rates in most cases, although the rates are still often lower than conforming rates.
DIRTY LITTLE SECRET
Mortgage banks hate jumbo!
The reasons are several fold, and include: (1) They require far more work on the part of everyone involved; (2) They are far riskier with respect to loan buybacks and penalties for errors; and (3) They are far less profitable because there are no or very few additional “pickups” (revenues) when the loans are sold – when mortgage banks sell conforming loans they get extra fees or revenues for servicing rights and other reasons that are not available when jumbo loans are sold.
For these reasons, many mortgage banks discourage jumbo lending.
But not at JVM. We love jumbo!
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
