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50bps, but in the last 6 months we have seen it widen to an average of about 125 bps. If lenders offer these potential borrowers the same rates that are offered on loans that currently fall under $417,000, then this will be a great benefit to homebuyers/homeowners that live in the expensive MSA’s. What remains to be seen is how welcoming the banks are to this new limit. On the one hand, many investors have been burned in the last 18 months by bad loans, and are still calculating losses on their mortgage portfolios; on the other hand is the liquidity issue for borrowers of prime jumbo loans. If these jumbo loans can now be sold to the agencies and are therefore guaranteed, mortgage pipelines could start flowing again.
From the investor’s perspective, the big question is how to model prepayments for these new “conforming jumbos.” We have observed prepayments for many years on jumbo loans, and it seems likely that underlying borrower behavior will not change simply because of lower interest rate availability. From a modeling perspective, it would be acceptable to use a jumbo model for the new pools, but with a slight tuning adjustment of the slide factor. By “sliding” the underlying refinancing thresholds to account for the new rate benchmark for the conforming jumbos, models should give accurate results. These loans will still be prime quality, so all of the concerns after the sub-prime fallout will be minimized here, since only credit-worthy borrowers will qualify for these loans. One behavior that might be observed is in the current jumbo market. How many borrowers will look to refi their jumbo loans into these new conforming jumbos in order to take advantage of the lower interest rates? Also, since there is no timetable given for these temporary limits to be changed, what happens to the non-agency jumbo market through 2008? What will new origination volume levels be? Also, will lenders offer the same rates for a $300,000 loan as they will for a $650,000 loan?
While we know more today than we did three months ago, there are still several questions that remain unanswered. We will be monitoring this issue closely over the next several months and will offer more insight as our research continues.
