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Jumbo Loan Rates Reflect Continued Economic Uncertainty

The jumbo loan market has always been more risky than conventional loan markets. Fannie Mae and Freddie Mac refuse to purchase mortgages that are larger than a certain dollar amount called the conforming loans. Non-conforming or jumbo loans carry higher rates than conforming loans. The spread between the rate on a 30-year jumbo loan and the rate on a 30-year conventional loan says a lot about the state of the economy. In 2009 the spread reached an all-time record high of over 1.6 percent.

Over the past week, from October 27 to November 4, 2011, government bond yields experienced large moves as investors expressed confidence then fear about the European debt crisis. A potential resolution actually introduced new uncertainty as the Greek government announced they would conduct a referendum on the agreed-upon bailout plan. The 10-year Treasury note, a benchmark for mortgage rates in the United States, moved from 2.42 at the height of renewed confidence back down to 2.01 at the bottom and then recovered once more to settle at 2.06.

Jumbo mortgage rates moved in response to these influences from government bond yields. Starting at 4.41 percent, the rate on the 30-year jumbo loan moved down to 4.25 percent on November 2. The rate moved back up to 4.28 percent by November 4.

Jumbo mortgage rates are affected by the size of the conforming limit imposed by Fannie Mae and Freddie Mac. The two government-sponsored enterprises (GSEs) changed the conforming limit on October 1, lowering it in many areas. Expensive zip codes were hit the hardest. A lower conforming limit means monthly payments go up for jumbo loan borrowers as jumbo loan rates rise to compensate for the new limit.

Jumbo mortgages played a large role in the U.S. housing bubble. Higher home prices pushed more homes past the conforming limit, which Fannie and Freddie raised in attempts to keep the overall proportions similar. Jumbo loan rates were pushed to record lows alongside conforming loan rates, sparking huge demand increases among wealthier buyers. The housing crash pushed up delinquency rates, triggering huge rate increases as lenders reacted to the sudden decrease of supply.

Today, similar dynamics are playing out as the result of various news items coming out of Europe. The government bond market is in turmoil as investors desperately try to arrive at some semblance of stability. Until this happens, rates on jumbo and conforming loans will continue to jump up and down.