Why Are Jumbo Interest Rates So Much Lower Than Conforming?

A young man stands with a backpack in front of an orange house with pink flowers that he purchased because jumbo interest rates were low. Our jumbo rates are now sometimes as much as 1/2% lower than conforming (Fannie/Freddie) rates (and today is no exception).

Today’s blog explains some of the reasons why.

Stricter Qualifications

Jumbo loans are often much “safer” than conforming loans from a risk perspective because jumbo guidelines are often much stricter with respect to credit, reserve requirements (after close), debt ratios, and down payments. For example, one of our best jumbo investors requires 12 months of payments for all properties to be available as reserves after close of escrow. In contrast, conforming loans often require very little or no reserves after close.

G-fees

Also known as guarantee-fees, these are additional fees that Fannie and Freddie tack on to the loans they buy (in exchange for their guarantee) that result in higher rates. Jumbo loans do not have G-fees.

Appraisals

Jumbo lenders tend to be much stricter when it comes to appraisals too, making the loans that much safer. There are no appraisal-waivers in jumbo land, and almost every jumbo lender requires some sort of appraisal review for every transaction.

Awash in Cash/Chasing Yield

When the Fed is holding rates artificially low and effectively flooding the economy with cash, banks look for any avenue they can find to earn a return. They love relatively safe jumbo mortgages in particular when they are apprehensive about business lending. Our current environment is a great example of this situation where large commercial banks are not lending to businesses like they did in the past and they are very aggressively buying mortgages.

“Buying the Market”

There are occasions when a particular jumbo lender suddenly needs to turn a huge amount of cash into mortgages for a variety of reasons. And when that does happen, that lender will offer below-market rates until they unload all that cash or buy all the mortgages they need. This is something we do not see very often in the conforming arena.

Lending At A “Loss” For Banking Relationship

Some jumbo lenders will actually loan money at rates that are too low to be profitable. They do so with the hope of attracting high net worth borrowers who might be enticed to establish other types of banking relationships that might include equity lines, investment advisory services and/or high balance deposits.