The Federal Housing Finance Administration has confirmed there will be a new conforming loan limit next year. For the first time in a decade, the loan limit will increase, from $417,000 to $424,100. What will the effect of this one percent plus rise be? Maybe not as much as it has in the past.
That’s because the inversion of the conforming and jumbo lending interest rates that we’ve seen in recent years has taken away the advantage (historically a rate about 25 basis points lower) that conforming loans traditionally have had over jumbos. A recent analysis of nonconforming jumbo loan rates suggests that a jumbo loan in this new $7,100 slice of loan amounts would still be cheaper for the borrower than a conforming mortgage, by about 20 basis points.
Figure 1 shows the trend using our data that overlays the jumbo minus conforming rates. If the line is above zero, it’s cheaper to go conforming, if the line is below zero, it’s cheaper to go jumbo. Today it’s more expensive to finance using a conforming loan than to use a jumbo loan.
So why would any buyer go conforming, if not for a pricing advantage? Two reasons: a lower down payment, or more flexible underwriting. Those advantages have always been there, but traditionally the pricing advantage was the most important. Now it’s a penalty of about 20 basis points. So the impact will not be as big as in the past (and the impact in the past was fairly small).
The chart shows that conforming loans were a better deal between 2001 through about the end of 2003. Then the inversion (jumbos becoming a better deal) held through the middle of 2007. The inversion reversed and stayed with the historical norm (conforming cheaper) until 2013 when the inversion returned. Note that the current inversion is deeper than the one from ten years ago.
It’s not that the jumbo securities market is thriving and driving the yields of jumbo mortgages down. For years after the market crash the jumbo private label MBS market was minimal. While it recovered some last year, 2016 has remained a challenging year. However, depositories traditionally have found jumbo mortgages to be attractive portfolio products.
It is doubtful that the one percent rise in the loan limit will trigger protests from banks that we saw in the early part of the last decade when critics argued that the steadily rising conforming limits were giving the GSEs too much of the market.
What’s the real significance of the rise? It could be read as the final chapter in the real estate crash because the Housing and Economic Recovery Act of 2008 forbade any rise in the conforming limit until real estate prices (which drive the conforming loan limit calculation) had topped their pre-crash highs.
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