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Jumbo Mortgage Divide Starts Shrinking

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Even as mortgage rates begin to rise, the difference between conforming and jumbo loan rates is shrinking, and that is good news for buyers of higher-priced homes.

Conforming loans are largely financed by Fannie Mae and Freddie Mac, and are valued at up to $417,000 — although they can be as high as $625,000 in some of the nation's pricier markets.

Jumbo loans are anything above that and are funded by banks or private investors. Rates used to be far higher for jumbo loans, but that is changing fast.

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The spread between a jumbo and a conforming mortgage rate was as wide as 0.875 percent last summer. It is between 0 and 0.25 percent as of Monday. Last week, the Mortgage Bankers Association reported the average rate on the 30-year fixed conforming mortgage was at 3.70 percent and the average rate on the 30-year fixed jumbo rate was at 3.80 percent.

"The jumbo market has heated up, as tight lending guidelines have drastically reduced consumer late payments, strategic defaults, and foreclosures," wrote Julian Hebron, a mortgage banker in California and author of the blog The Basis Point. "This gives investors confidence to buy jumbos again, which means lower rates for consumer borrowers. These borrowers can count on lending guidelines remaining tight, but all that means is a bit more paperwork when getting a loan."

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The jumbo securitization market is tiny, however, as most jumbo loans are still held on bank balance sheets. There are so far just two players in jumbo securitizations, Redwood Trust Inc. and very recently Credit Suisse Group AG, although others, including JPMorgan Chase, are preparing to join them.

There were no jumbo securitizations at all between 2008 and 2010. When Redwood dipped its toes in, securitizations totaled less than $1 billion in 2010-2011. By 2012 they hit $3.5 billion, according to Inside Mortgage Finance, and are already at $2 billion so far for 2013. Hebron believes they could surge dramatically in the very near future.

The rebirth of jumbo securitizations is being driven not just by investor confidence, but by growth in jumbo originations, which increased after the conforming loan limit was lowered. Originations of non-agency jumbo mortgages jumped by over 19 percent in 2012 from 2011, according to Inside Mortgage Finance.

So why is the conforming-jumbo spread shrinking? Not because jumbo rates are falling but because conforming rates are rising due in part to government intervention.

"Congress keeps raiding the guarantee fees (g-fees) Fannie and Freddie charge lenders in the securitization process for other purposes, like funding payroll tax cuts," noted Hebron. "For each 10 basis point hike in g-fees, we've seen consumer rates rise about 0.125 percent.

While jumbo loans often have even tighter guidelines than conforming, they are certainly obtainable and will likely get even cheaper as investors find them more palatable. That is good news for the higher-priced housing market, which had been cash-strapped and cold due to lack of credit.

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It is now coming back with a vengeance.

Sales of homes priced over $750,000 were up 39 percent in January, according to the National Association of Realtors.

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

Questions? Comments? RealtyCheck@cnbc.com

  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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