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In volatile mortgage market, spreads between conforming and jumbo loans widen

The 30-year fixed-rate mortgage fell last week to 6.66%. But borrowers can get lower rates with jumbo loans

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The latest weekly survey data from Freddie Mac shows the 30-year fixed-rate mortgage decreased four basis points last week to 6.66%, after jumping 40 basis points in the previous week, reflecting volatility due to the ongoing economic uncertainty. 

But qualifying borrowers can get lower rates with jumbo mortgages, as the spreads between these loans and the conforming option widened again this week. Meanwhile, given that jumbo loans are usually for higher income homebuyers, the current landscape is of extreme affordability challenges.

The Freddie Mac’s index compiles purchase mortgage rates reported by lenders during the past three days. It’s focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20% down and have excellent credit. 

A year ago at this time, rates averaged 2.99%. “Rates remain quite high compared to just one year ago, meaning housing continues to be more expensive for potential homebuyers,” said Sam Khater, Freddie Mac’s chief economist.  

On HousingWire’s Mortgage Rates Center, Black Knight’s Optimal Blue OBMMI pricing engine measured the 30-year conforming mortgage rate at 6.651% on Wednesday, up from 6.643% the previous week. Meanwhile, the 30-year fixed-rate jumbo (greater than $647,200) showed lower rates: 6.137% Wednesday, down from 6.294% the week prior. 

At Mortgage News Daily, the rates were 6.95% for conforming and 5.95% for jumbos on Wednesday, a spread of 100 basis points. 

The Mortgage Bankers Association (MBA), however, measured the average contract for conforming at 6.75% this week, compared to 6.52% the previous week. For jumbo loans, it went from 6.01% to 6.14% in the same period. 

Going back to the Financial Crisis, when mortgages were toxic, spreads were around 250 to 300 bps versus the comparable maturity of 10-year Treasury. Right now, they’re the highest since [the Financial Crisis].

Matt Graham, founder and CEO of MBS Live

“The jumbo rates are offering an excellent opportunity in terms of where they are now compared to the conventional ones, especially jumbo ARMs,” a South Carolina retail loan officer told HousingWire. “Fannie Mae and Freddie Mac don’t have a lot of appetite right now. The government is trying to choke this off.”

According to the South Carolina LO, some homebuyers applying for jumbo loans are borrowers that historically would pay in cash but are hit hard by the current turbulent stock market. 

“With the stock market down, people don’t want to lock in their losses by selling off their investments to buy a house in cash,” the LO said. “Despite rates higher than a year ago, mortgage loans are still an attractive alternative for them.”

Borrowers with lower income, however, would pay more for a conventional loan, which shows the current landscape is creating affordability challenges, the LO said. 

All about the spread 

Rising mortgage rates reflect Federal Reserve’s tightening monetary policy to control surging inflation. The Fed increased the federal funds rate by 75 basis points at its Federal Open Market Committee (FOMC) meeting in September. 

Another 125 basis points in hikes are still expected to come in 2022, with a federal funds rate topping out well above 4%.

Treasury yields show higher rates in the short term, signaling a recession on the horizon. The 2-year note, most closely tied to the Fed’s interest rate moves, increased eight bps to 4.15% on Wednesday from the prior week. The 10-year note went from 3.72% to 3.76% in the same period.

“Going back to the Financial Crisis, when mortgages were toxic, spreads were around 250 to 300 bps versus the comparable maturity of 10-year Treasury. Right now, they’re the highest since [the Financial Crisis]. To me, that suggests a little bit of a push up,” said Matt Graham, founder and CEO at MBS Live on Wednesday during the 2022 HousingWire Annual in Scottsdale, Arizona. 

Lookin ahead, he said “For mortgage rates to actually recover more, the market needs time assignment – whether you find investors are getting comfortable, we’re getting a mortgage rate, which is what we’re back up today, more or less.” 

Pressure on rates has sharply reduced demand for mortgage loans, according to the MBA. The market composite index, a measure of mortgage loan application volume, declined 14.2% for the week ending Sep.30. It was also affected by Hurricane Ian’s arrival in Florida. The refinance index had a 18% decline from the previous week, and the purchase index was down 13%.

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