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What Will Jumbo Rates Do This Week?

Jumbo mortgage rates are always higher than conventional mortgage rates. The spread between the two rates can serve as an economic indicator. During 2008, the most disastrous year for the economy since the 1930s, the spread between jumbo and conventional mortgage rates widened from a normal spread of .25 percent to a full 1.4 percent. The spread went back down to a low of less than .17 percent before rebounding in October to around .44 percent. Jumbo rates have been very erratic in the past few weeks.

The temporary increase in the conforming limit authorized by Congress through the Economic Stimulus Act of 2008 expired recently, which put upward pressure on jumbo mortgage rates. They promptly went up from their low of 4.11 percent to 4.31 percent as of October 7, 2011. Interest rates throughout the economy have been bottom-bouncing, e.g. rising and falling only by incremental amounts since falling a large amount to their new low levels. The Federal Reserve’s zero interest rate policy (ZIRP) is continuing to put a lot of downward pressure on interest rates. They seem to have found a floor and are as yet unwilling to go down any further. The recent decrease to new record lows is quickly being erased as rates recover themselves in response to positive economic data.

Positive data in the employment sector as well as news of a potential deal to resolve the European debt crisis has sent government bond yields as well as stocks reaching for the sky. Higher bond yields translate into higher mortgage rates due to the influence bond yields have on mortgage-backed securities and the mortgage market in general. As yields rise on mortgage-backed securities, a chain reaction is initiated that results in higher rates in both the conventional and jumbo loan markets. Jumbo loan rates will likely move higher this week, reflecting the influence of rising bond yields.

The benchmark 10-year Treasury note has risen above the two percent level again to 2.07 percent. This will raise jumbo loan rates possibly to the levels they reached last September, around 4.39 percent or so. Speculating what rates will do is pointless due to the literally millions of participants on both sides of the jumbo loan rates equation. Rising yields equals rising rates. Given this sign, if Operation Twist does not work as planned, the Federal Reserve may have to rethink its approach to the ailing housing market.