Mar 27
Jumbo Loans Not Included in Secondary Market
Jumbo loans will be exempt from the secondary mortgage market where Fannie Mae, Freddie Mac, and the Federal Housing Authority (FHA) purchase mortgages. Those loans between $417,000 and $729,750 – ‘jumbo light’ loans – will not be traded on the ‘to be announced’ (TBA) market, it was announced in a February article at Inman.com, as well as several other sources, including a press release on the Fannie Mae site. The Securities Industry and Financial Markets Association (SIFMA) worry that the larger loans may raise rates on the smaller conforming loans because of performance uncertainties that would, in turn, raise costs or hinder the trading of all mortgage-backed securities.
Instead, this new class of mortgages will be traded under unique pool codes or included in alternative mortgage investment transactions, specifically the Real Estate Mortgage Investment Conduit (REMIC). SIFMA feels this process will be the least disruptive to the secondary mortgage market for these higher balance loans, creating greater liquidity and interest rate relief to the jumbo mortgagee.
A downside to this placing the jumbo loans in separate pools is that this could delay the lower interest rates Congress had hoped to achieve if Fannie Mae, Freddie Mac, and the FHA had been allowed to by these loans. In fact, interest rates on the jumbo loans have gone up, and are about 1 percent higher than conforming loans.
Guarantees from Fannie, Freddie, and Ginnie Mae backing conforming loans relieves investors’ fears about delinquent payments and defaults. The jumbo loans carry an inherent higher risk. SIGMA wants to keep these jumbo loans in separate trading to belay these risks. As investors get more comfortable with the jumbo loans and the collateral they carry, it’s predicted interest rates will drop on these larger loans over time as well.
