THE BASIS POINT

WeeklyBasis 5/12/08: Super Conforming Rates Down .5%

 

Jumbo and conforming rates open this week about even because mortgage bond markets were relatively stable last week, trading on little economic data. But rates on super conforming loans from $417,000 to $729,750 are down by about .5% after Fannie Mae committed to provide more liquidity for these loans.

I expect rate volatility to return this week as critical consumer and commercial economic data is released. Retail Sales come out tomorrow, Consumer Price Index (inflation data) comes out Wednesday, and the Philadelphia Fed Index (manufacturing activity and costs) comes out Thursday. CPI and Philly Fed will be especially important since the Fed and bond markets are on high alert for inflation signals. If inflation is higher than expected, rates will rise.

SUPER CONFORMING GUIDELINES
The super conforming rate drop is good news, but approval guidelines for these loans are strict. Borrowers must have at least 10% equity, or at least 15% equity if their property is a designated declining market—even San Francisco and Marin Counties are on many lenders’ declining lists. Cash-out loans require 25% equity, and cash-out is limited to $100k. Loans require full documentation, 1-unit properties only (condos ok), debt-to-income ratios of 45% or lower, and 700 minimum credit scores.

Fannie Mae has said they may announce less stringent guidelines as soon as this week, but all lenders can overlay their own risk-control guidelines and rate premiums beyond what Fannie Mae (or Freddie Mac) may require.

WHY SUPER CONFORMING RATES DROPPED
The super conforming rate drop is an important lesson in how conforming rates are derived. Rates are based on mortgage bond prices, and the system for liquidity and rates goes like this: lenders close their consumer loans then sell them to Fannie Mae/Freddie Mac who package them into bonds; daily prices of these bonds tell lenders what level of liquidity is available in the open market; and they price new consumer rates based on these daily bond prices.

Since super conforming loan products are brand new, there aren’t yet mortgage bonds based on these loans. So the price Fannie or Freddie is willing to pay lenders for them is the only way lenders can determine consumer rate pricing. When Fannie first started purchasing super conforming loans from lenders on April 1, they were buying these loans at lower prices than traditional conforming. But last Tuesday, they announced that they would raise their super conforming purchase prices up to (roughly) the same level they’re paying for traditional conforming. Many lenders responded well to this, and passed that spread onto consumers. This is why consumer rates dropped by as much as .5%.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.0% (6.15% APR)
15 Year: 5.625% (5.765% APR)
5/1 ARM: 5.875% (6.025% APR)

Super-Conforming ($417,001 to $729,750 cap by county) – NO POINTS
30 Year: 6.25% (6.275%)

Jumbo ($417,001 – $1,000,000) – NO POINTS
30 Year: 6.875% (7.025% APR)
7/1 ARM: 6.625% (6.765% APR)
5/1 ARM: 6.125% (6.275% APR)

 

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