Loan Limit Increase Creates New Loan Class
One of the unknowns about the stimulus package is whether the newly raised conforming loan limit would have the desired effect of allowing homeowners in higher cost real estate markets to refinance or purchase using lower priced conforming interest rates.
We got the answer today; NO! Well, it’s part of the answer anyway.
The Securities Industry and Financial Markets Association, a banking industry group, said those larger loans above the former limit of $417,000 will not be allowed on a widely used trading market, known as the “To Be Announced” market, which permits investors to buy and sell mortgage-backed securities before the loan pools are put together.
You may recall the implications and explanations of this were discussed previously. Essentially the SIFMA
has said the newly conforming loans will have to be priced differently to be traded on the TBA market. Whether that price adjustment is a savings from Jumbo rates, we don’t yet know. Remember also, the risk being concerned with by the Association isn’t default as much as it is early repayment.
But Sean Davy, a managing director at SIFMA, said loans larger than $417,000 exhibit different characteristics than loans below that limit. For example, wealthier homeowners are more likely to pay off their loans earlier.
Therefore, he said, bankers decided that those loans should be packaged and sold separately. Doing so, he said, will be less disruptive for mortgage market investors.What we do know is the stimulus package has created a new level of loan ($417,001-729,750, conforming guidelines) that is so far unnamed. Tanta at CR suggested these mortgages be called LFKAJ (Loans Formerly Known as Jumbo). That’s quite a mouthful. May I suggest “mid jumbo?” Small jumbo would be an oxymoron. Mid jumbo suggests something bigger than normal, but not as big as jumbo. I kind of like it.
Let me know what you think.