Jumbo loans, smaller rates

by Ryan Smith09 Sep 2013

It’s good to be the king. Valet parking at all the best restaurants, designer clothes, maid service. And as of right now, lower interest rates for the mortgage on your castle than the serfs next door.

According to a Friday New York Times report, interest rates on so-called “jumbo” mortgage loans have recently fallen below those for smaller loans that are guaranteed by the federal government. As of Thursday, for instance, Wells Fargo was offering fixed-rate 30-year jumbo mortgages at 4.625%, while smaller loans that qualified for government backing were being offered at 4.875%.

At first glance, that seems like doing business on Bizarro World. Giant mortgages aren’t backed by the government, so the greater risk has always meant higher rates. But that’s just not the case anymore, according to former mortgage trader Scott Simon.

“That’s the old math,” Simon told NPR Friday. “In the new world, that doesn’t have to be true. These are incredible borrowers, and the banks want to do business with these people because they can do so much other business with them.”

Meanwhile, traditional loans are getting more expensive as concerns over the Fed’s taper timing play havoc with interest rates – and as Fannie Mae and Freddie Mac jack up the fees they charge to guarantee traditional mortgages. 

Simon told NPR that while those fee hikes are hitting borrowers right in the wallet, they may have the effect of speeding Fannie’s and Freddie’s recovery.

“I’m not sure it’s a good thing or a bad thing,” Simon said. “What it’s going to do is make Fannie and Freddie incredibly profitable.”