With mortgage rates rising to levels not seen for two years, it's hard work finding a great deal on a home loan — unless you're rich enough to need a jumbo mortgage.
These loans on steroids certainly aren't for everyone: Jumbos are defined as mortgages over $625,500 in much of California and more than $417,000 even in places where homes are cheap.
But if you can qualify, America's banks stand ready to reward you with a rate nearly as good as or even better than what you can get for a normal loan. This is an unprecedented situation because jumbos historically have come at a premium price, said Brad Blackwell, executive vice president of No. 1 mortgage lender Wells Fargo Home Mortgage.
"This is a new phenomenon — something we've never seen before," Blackwell said in an interview.
Freddie Mac said Thursday that lenders were offering non-jumbo 30-year fixed-rate loans to solid borrowers at an average of 4.57%, up from 4.51% last week and a recent low of 3.35% in May. The borrowers would have paid 0.7% of the mortgage amount in upfront lender fees to obtain the rates.
Rates for 15-year fixed mortgages and adjustable loans also rose, a trend attributed to stronger growth in the gross domestic product and positive surveys on manufacturing and home building.
Additional encouraging reports Thursday on unemployment and hiring drove the yield on the 10-year Treasury note — a mortgage-rate benchmark — to nearly 3%, its highest level since July 2011. Home lending rates were volatile but continuing to move higher, mortgage professionals said.
But that same improving economy also has heated up competition among lenders to make jumbo mortgages, which are too big to be backed by Freddie Mac or Fannie Mae. They are written mainly for affluent residents of the East and West coasts, where home prices have risen rapidly over the last year.
Jumbos, like all mortgages not backed with a government guarantee, nearly disappeared after the financial system cratered in 2008. Rates jumped nearly two percentage points above those for Fannie and Freddie loans, compared with a usual spread of one-eighth to three-eighths of a percentage point higher, said Keith T. Gumbinger, vice president of financial publisher HSH.com.
HSH and fellow data tracker Bankrate.com calculate that lenders are now offering 30-year fixed-rate jumbo loans at the extreme low end of their normal range — an eighth of a percentage point or so above so-called conforming rates.
But the Mortgage Bankers Assn. said loans actually made within the last few weeks showed average jumbo rates lower than those for the smaller conforming mortgages that can be sold to or guaranteed by Freddie and Fannie. The trade group said the average contract rate for a conforming loan with a 20% down payment was 4.73% last week, compared with 4.71% for a similar jumbo loan.
The difference was more pronounced in the "hybrid" loans, popular with affluent buyers, that have a fixed rate for five, seven or 10 years before becoming adjustable.
Wells Fargo's Blackwell said his bank was making 30-year fixed jumbos with no upfront costs to borrowers at 4.75% on Thursday, compared with smaller conforming loans at 5%.
For a loan with a rate fixed for the first 10 years, Wells was writing mortgages at 4.125% for jumbo borrowers compared with 4.875% for conforming loans, he said.
The reason for the difference is that Wells Fargo has been keeping low-risk jumbo loans on its books rather than selling them as fodder for mortgage-backed securities.
That was a good deal for Wells because big banks are flooded to the gills with deposits that are costing them virtually nothing. Wells Fargo, for example, reported that as of the second quarter this year it was paying an average of 0.14% a year interest on its $1 trillion in deposits.
Over the last three years, Wells Fargo has added about $100 billion in home loans to its own portfolio. That's not enough to pose a risk to a bank with $1.4 trillion in total assets, Blackwell said, but plenty to make a big return on the cheap deposits it's lending out.