Interest rates on jumbo 30-year fixed-rate mortgages (FRMs) dropped below interest rates on conventional 30-year FRMs, TIME recently reported. April closed with a 4.47% average interest rate on jumbo loans compared to 4.48% for conventional FRMs.
Historically, jumbo mortgages — usually exceeding $417,000 but varying by region — are offered at higher interest rates to offset the risk of lending larger sums. But tighter underwriting regulations and increased fees to lenders have translated into steeper interest rates on conventional FRMs. Thus, higher FRM rates have closed the gap between jumbo and conventional mortgage rates and upended this traditional balance.
As expected, increased funds to well-heeled borrowers have resulted in an upsurge of home sales in higher price ranges. In fact, sales above $1 million have increased by 7.8% nationwide over the last year, in contrast to the concurrent 7.5% drop in overall home sales.
Since April, conventional mortgage rates have slightly dropped below jumbo rates: jumbo 30-year FRM rates are at 4.29% and conventional 30-year FRM rates are 4.31% as of May 22, 2014. Yet, this razor thin spread of 0.02% is much lower than the usual 0.25% spread (which is near the excess FRM spread over the 10 Year Treasury Note rate).
What does this recent interest rate role reversal tell us about current market trends?
It provides insight into who lenders are opening their pocketbooks to.
Lending large mortgage amounts is no longer the high-risk venture it once was — at least, not if the borrower is well-off and financially capable of repaying the debt. Using lower cost-of-funds to their advantage, lenders are desperate to court affluent borrowers able to shoulder greater mortgage debt, and in turn, raise revenue for lenders on the high dollar loans. Perhaps it’s not coincidental that those in the upper economic echelons have been the only class to consistently flourish during this prolonged and ongoing period of economic stagnation.
Let’s not forget these changes arrive on the hems of increased Fannie Mae and Freddie Mac guarantee fees, a cost passed on to middle-class borrowers as higher interest rates.
While the spread of income inequality widens within the population, the spread between jumbo and traditional mortgages narrows. This diminishing gap is also closing the door to homeownership, reducing the percentage of middle class homeowners, as more high-tier sales and speculator activity in low-tier sales propel prices upward. This is a trend we’ve seen take root in 2012, blossom in 2013 and now begin to whither in 2014.
