WeeklyBasis 2/10/08: What To Expect From Higher Conforming Loans

Fixed rates are even versus last week and ARM rates open the week down .125% from last Monday, but the volatility continues with rate swings of up to .375% on any given day. This is proof that credit markets are still not functioning properly, and that’s the topic on Capitol Hill Thursday when Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and SEC Chairman Chris Cox will sit before the Senate Banking Committee for testimony and a Q&A about why financial regulators missed the credit bubble.

But before that, we have January Retail Sales Wednesday. After January Chain-store sales came in their weakest in decades, it’s hard to expect different from the Retail Sales figure. Retail Sales account for approximately 30% of GDP so the monthly report has a huge impact on rates. A weak number would normally cause rates to drop, but even if the number is weak, I expect mortgage bonds (which daily rates are derived from) to temper their rally until traders hear Thursday’s Senate testimony for some additional cues on the economy. (Remember: rates are derived from mortgage bond yields in real-time daily trading, NOT periodic changes to Fed rates). Rates are very low right now and timing the volatile market is dangerous; my advice is to lock rates on ratified purchase contracts.

President Bush is expected to sign HR-5140, a House and Senate-approved economic stimulus package into law Wednesday. It’s designed to prevent or at least minimize recession and includes approximately $100b in tax rebates to individuals, $50b in tax incentives for business, and raising FHA and conforming loan limits temporarily until December 31, 2008. HUD secretary Alphonso Jackson has roughly 30 days from Wednesday to determine conforming loan limits for all metropolitan statistical areas nationwide. The HUD formula is as follows: The temporary loan limit for an area would be [local area median price x 125%] with a cap of $729,750. It’s easier to understand if you look at my list of estimates for some regions so far.

Anyone who has a mortgage or mortgages on their home up to the new conforming limit for their area is eligible to refinance (see RATE section below). Given HUD’s rough timeline, this could happen as soon as March 13, but lenders also need time to implement the new guidelines, so that could push the timeline out further. Lenders will quickly become overwhelmed and closing turn times could take 30-60 days, so refi clients need to get everything ready now to avoid the rush. For my clients purchasing homes right now with jumbo loans that will later qualify for conforming limits, I am working out low to no cost refis on a case by case basis.

There has always been tiered pricing in the Jumbo market. Rates on Jumbo loans from $417k to $650k can be lower than rates on loans from $650k to $1m, and so forth as loan amounts rise into the ‘Super Jumbo’ realm above $1m. Early lender chatter is that when conforming limits rise, we may see higher rates on the ‘Super Conforming’ tier from $417k to $729k. We also may see rates on all conforming loans rise as a result of the new loan limits. Right now, conforming 30yr fixed rates are about 1% lower than jumbo rates. Conforming 5yr, 7yr and 10yr ARMs are about .5% lower than jumbo rates. If we had a so-called Super Conforming pricing tier, or if conforming loan limits rose in general, expect the benefit of a new Super Conforming versus a jumbo to be cut in half or worse. This might not happen, but such adjustments are a normal part of open market pricing, so just be aware of it.

In the grand scheme, this conforming loan limit strategy is designed to ease credit market tensions. If you recall, the credit freeze started early-August. All major lending institutions still have Jumbo loans on their books from that time that they still can’t move in secondary markets. An additional provision of the stimulus package is that Fannie Mae and Freddie Mac can purchase new-limit conforming loans originated from July 1, 2007 forward. This means many previously Jumbo loans can how be sold to Fannie or Freddie, which should help break the Jumbo loan log jam and bring some liquidity to markets. Even if conforming loan rates end up slightly higher, this added liquidity will hopefully remove some of the risk premium currently priced into Jumbo rates. If jumbo rates came down, it would further thin the conforming/jumbo spread, which is good for borrowers, financial markets, and as everyone hopes, the economy.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 5.75% (5.89% APR)
15 Year: 5.25% (5.37% APR)
5/1 ARM: 5.25% (5.39% APR)

Jumbo ($417,001 – $1,000,000) – NO POINTS
30 Year: 6.875% (7.03% APR)
5/1 ARM: 5.875% (6.02% APR)
7/1 ARM: 6.125% (6.27% APR)