The Wall Street Journal
The executives testified Thursday before the House Financial Services Committee, whose chairman, Rep. Barney Frank, a Massachusetts Democrat, was seeking information on why such mortgages have remained relatively expensive.
Jumbo mortgages are those larger than the normal limit — currently $417,000 — on loans that can be sold to Fannie and Freddie, government-sponsored companies that provide the bulk of funding for U.S. home loans. Rates on such loans soared in mid-2007 as rising defaults caused investors to shun loans other than those backed by Fannie, Freddie or the Federal Housing Administration. High rates on jumbo loans hurt housing demand in expensive areas such as California or much of the East Coast, where even a modest home often costs more than $500,000.
In February, Congress passed legislation raising the ceiling on loans that can be purchased by Fannie or Freddie or insured by the FHA to as much as $729,750 in the highest-cost areas. The expanded limits are due to expire at the end of this year, but Congress is working on legislation that would permanently raise the ceiling for Fannie and Freddie to at least $550,000.
Although the ceiling is higher, loans of more than $417,000 continue to be significantly more expensive. That is partly because investors see the larger loans as being more likely to be refinanced quickly if interest rates fall, making them less attractive as investments.
But the gap has narrowed. HSH Associates, a financial publisher in Pompton Plains, N.J., said its surveys showed the average rate last week for a 30-year fixed-rate mortgage of $417,000 or less eligible for sale to Fannie or Freddie was 6.17%. The average for such loans of between $417,000 and $729,750 was 6.61%, or 0.44 percentage point higher. (The rates are for loans on which borrowers don’t pay any “points,” or fees, to reduce the rate.) In March, the larger loans carried rates as much as about 1.30 points more.
Fannie and Freddie said their more aggressive purchases of jumbo loans in recent weeks have brought rates down.
Hudson City Savings Bank, Paramus, N.J., a unit of Hudson City Bancorp Inc. that makes mortgage loans in the Northeast, is offering a 6.25% rate on jumbo loans, compared with 6% for smaller ones. Hudson retains the loans rather than selling them to investors like Fannie or Freddie.