September 11, 2013 by Coester

The market could blame higher guarantee fees and uncertainty around the Federal Reserve tapering its bond-buying program for the unprecedented inversion in pricing between conventional and jumbo loans. However, this is only a small contributor to the mortgage rates for the latter dipping below the former recently. And it could become a long-term trend.

The change in dynamic comes during a time when nonconforming jumbo loans with 20% downpayment had an average contract rate of 4.71% while a comparable conforming loan had an average rate of 4.73%, according to the Mortgage Bankers Association.

Large bank demand for jumbo loans is the primary driver in this unprecedented paradigm and may keep this relationship inverted well after uncertainty around tapering is resolved, explained Deutsche Bank analysts in their latest report.

“Large banks are likely highly motivated to add non market-to-market assets, given that under Basel III changes in value of their available for sale securities portfolio will flow through their regulatory capital starting in 2014,” Deutsche Bank analyst Christopher Helwig said.

He added, “Additionally, proposed increased leverage requirements at the largest banks could skew the value proposition in favor of jumbo loans versus residential mortgage-backed securities.”

Mega bank demand for jumbo loans is dramatically increasing and it should be noted that the private-label residential securitzation market highly favors this mortgage product.

The jumbo loan phenomenon comes at a time when Fannie Mae and Freddie Mac are in talks of reducing their conforming loan limits, hoping this change will reduce the government’s dominant footprint in the mortgage market. The indication is that the government-sponsored enterprise are reducing their footprint on high-value mortgages. Financing the future demand, therefore, will come from another source.

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