The nation’s two largest government-sponsored financial service entities, Fannie Mae and Freddie Mac, have moved closer to helping borrowers secure mortgage loans in higher-priced markets.
The economic stimulus package recently passed by Congress raised the ceiling on loans originated from July 1, 2007 through the end of this year that the two agencies could purchase, or the Federal Housing Administration could insure, to $729,750, from $417,000. However, the rates on these so-called “jumbo conforming” loans within this range have been a full percentage point higher than conventional loan rates, primarily because of investors’ reluctance to back mortgages without knowing the terms under which Fannie or Freddie would be willing to purchase them.
On its Web site last week, Fannie Mae stated that since April 1 it has been providing “price certainty for all our customers for jumbo-conforming mortgages.” It states that the yield Fannie Mae requires for fixed-rate jumbos is 39 basis points higher than the yield for comparable fixed-rate conforming loans at or below the old $417,000 threshold. Fannie Mae also states that lenders can lock in pricing for 90 days and that commitments are available for both fixed-rate and adjustable-rate mortgages.
Freddie Mac provided even more clarity when it disclosed that it had struck a deal to purchase up to $15 billion in jumbo-conforming loans over the next 90 days from four major U.S. banks—Wells Fargo, JPMorgan Chase, Citigroup, and Washington Mutual. This agreement is restricted to 224 high-cost markets, as stipulated in the economic stimulus package. The Wall Street Journal reports that Freddie is negotiating to extend similar terms to other big lenders. The newspaper also quotes Bob Ryan, Freddie’s vice president of mortgage credit pricing, as saying that the jumbo-conforming rates should be around 0.5 to 0.75 percent above those on loans of $417,000 or lower.
Freddie is imposing restrictions on which loans it will purchase: borrowers must have a FICO score of 720 (versus 680 for the old conforming loan limit). Freddie will finance up to 90 percent of the home’s appraised value or 85 percent where home prices are declining. The agency is requiring full documentation of a borrower’s income, and is not allowing any refinancings for borrowers with piggyback loans (i.e., mortgages with two loans, one with a much-higher interest rate).
While FHA-insured loans at the higher limit are available with only a 3 percent downpayment, Fannie and Freddie are requiring borrowers to put down between 10 and 15 percent, depending on the amount being borrowed.