This week’s commentary from Fannie Mae economist David Berson states the spread between jumbo and conforming loans eased a bit late last month to 80 basis points after spiking to 90 basis points (or 9/10 of a percentage point) amid a lack of investor confidence for riskier mortgages.
Previously jumbo rates (for loans above $417,000) and conforming rates (for loans at or below $417,000) stayed within 15 to 25 basis points.
But, he writes, “the spread remains historically wide — suggesting that the prime jumbo market remains in distress.”
To see the full commentary, CLICK HERE.
As you also probably know, another type of “non-conforming” home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - this is of course a “jumbo loan” - but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.
The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher “risk premium” for taking on these pools of loans, as they see the rates of default are climbing higher.
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