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Rates Come Down On Jumbo Mortgage Loans

Sep 6, 2013
Originally published on September 6, 2013 12:40 pm

There is something new and different for home mortgages: Jumbo loans are being made at lower interest rates than traditional home loans. That's kind of like a first class airplane ticket being cheaper than riding in coach.

At first this seems crazy. For as long as anybody can remember, homeowners have had to pay a premium to get jumbo loans. That's because they're not guaranteed by the federal government. If they're not guaranteed, they're riskier, so they cost more in interest payments.

"That's the old math," says Scott Simon, who for many years was one of the biggest mortgage traders in the world. "In the new world, that doesn't have to be true."

Simon, who worked for investment firm Pimco, says right now banks are making most of those jumbo loans only to the very best customers — wealthy people with perfect credit, who can put a lot of money down.

So cutting them a good deal isn't crazy.

"These are incredible borrowers and the banks want to do business with these people because they can do so much other business with them," Simon says.

Meanwhile, big banks have more cash on hand to loan out to these very best customers.

And also, the government controlled mortgage giants Fannie Mae and Freddie Mac have been ratcheting up fees they charge to guarantee those traditional loans for the rest of America. That pushes up interest rates for average people who take out those smaller traditional loans.

"I'm not sure it's a good thing or a bad thing," Simon says. "What it's gonna do is make Fannie and Freddie incredibly profitable."

That profit will flow back to the U.S. Treasury, which controls Fannie and Freddie. So Simon says it won't be long before Fannie and Freddie have handed over more money to the government than it cost taxpayers to bail them out.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, HOST:

NPR's business news starts with new job numbers.

(SOUNDBITE OF MUSIC)

MONTAGNE: The U.S. unemployment rate dropped slightly in August, to 7.3 percent; 169,000 new jobs were added to economy, according to the government's monthly employment report, which was out this morning. The number of jobs was less than analysts had expected, and the small improvement in the unemployment rate was due, in part, to people dropping out of the labor force.

From job numbers now, let's turn to interest rates. Bigger, so-called jumbo loans are currently being made at lower interest rates than traditional home loans. That's a bit like a first-class airplane ticket being cheaper than coach. NPR's Chris Arnold explains what's going on.

CHRIS ARNOLD, BYLINE: At first, this seems crazy. For as long as anybody can remember, homeowners have had to pay a premium to get these bigger jumbo loans. That's because they're not guaranteed by the federal government. So if they're not guaranteed, they're riskier, so they cost more in interest payments.

SCOTT SIMON: Well, that's the old math. In the new world, that doesn't have to be true.

ARNOLD: That's Scott Simon, who for many years was one of the biggest mortgage traders in the world. He worked for a company called Pimco. He says for one, right now banks are making most of those jumbo loans only to the very best customers - wealthy people with perfect credit, who can put a lot of money down. So cutting them a good deal...

SIMON: That's not crazy because these are incredible borrowers, and the banks want to do business with these people because they can do so much other business with them.

ARNOLD: Meanwhile, big banks now have more cash on hand to loan out to these very best customers. And also, the government-controlled mortgage giants Fannie Mae and Freddie Mac have been ratcheting up fees that they charge to guarantee those traditional loans for the rest of America. And so that pushes up interest rates for average people who take out those smaller, traditional loans.

SIMON: I'm not sure it's a good thing or a bad thing. What it's going to do is make Fannie and Freddie incredibly profitable.

ARNOLD: That profit will flow back to the U.S. Treasury, which controls Fannie and Freddie. So Simon says it won't be long before Fannie and Freddie have handed over more money to the government than it cost taxpayers to bail them out.

Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.