When the Mortgage Bankers Association (MBA) issued its weekly purchase applications report on Wednesday, the group noted without comment that interest rates for a conforming mortgage (less than $417,000) were 4.73%. Interest rates for a nonconforming (jumbo) loan of more than $417,000 had dropped to 4.71%. Jumbo loans have never before carried a lower interest rate than a conforming loan.
The difference is not very great, obviously, but the switch indicates that interest-rate volatility in the face of an expected tapering of Fed asset purchases (which include mortgage bonds) makes a jumbo mortgage loan a more attractive opportunity for cash-rich lenders. Conforming loans are more likely to be packaged and sold to Fannie Mae or Freddie Mac, while jumbo loans are now more likely to be retained on a lender’s balance sheet. Because the banks have more control over their own balance sheets, the interest rate they charge for a jumbo loan reflects the attractiveness of the loan and the borrower more than it reflects bond prices.
Home buyers who qualify for a jumbo loan typically have more income and are better candidates to purchase other banking services such as credit cards and brokerage accounts.
An executive at Wells Fargo & Co. (WFC) told The Wall Street Journal that “the current inversion between jumbo and conforming rates could last ‘for the foreseeable future’ so long as banks’ cost of funds stays at its current level and loan demand doesn’t rise sharply.” Wells Fargo is the country’s leading mortgage lender.