An (American) Mortgage Market Out of Balance

Nick Ut/Associated Press

Nick Ut/Associated Press

My initial thoughts on the US mortgage market are always envy of their 30 year fixed mortgage. Hovering at the mid-to-high 4% range, how can you go wrong? Upon closer look, the disparity and inconsistency in the entire banking and regulatory system leaves me scratching my head. Where is the common sense? Isn’t it against all logic to give lower rates to non-conforming, non-guaranteed, larger mortgages? OK so the down payment comes to play, but isn’t it baffling that there is no set rules or requirements on the amount down payment required? And the final gigantic red flag – that general banking practices (not regulations mind you!) can potentially influence government standards which in turn influence banking practices? (That’s a circle for those of you who didn’t catch it!) Banks who don’t trust the government (backed securities), governments who don’t control the banks, and people who are stuck in the middle wary of both but left with no choices.

Reblogged from The New York Times, Peter Eavis

The vast system that provides home loans to millions of Americans has long been a strange place. A surprising development has made it even stranger.

Recently, interest rates on mortgages for expensive homes have fallen below those for smaller mortgages that the government promises to repay if the borrower defaults.

On Thursday, for instance, Wells Fargo, the nation’s largest mortgage lender, was offering to make the larger so-called jumbo loans at a fixed rate of 4.625 percent for 30 years. That compared with the 4.875 percent that the bank was charging on fixed 30-year loans that qualify for government backing.

On the surface, these moves in rates make little sense. The jumbo mortgages do not have a taxpayer guarantee of repayment. Anyone holding such loans relies solely on the creditworthiness of the borrowers to be repaid. Most of the jumbo borrowers are wealthy and have good credit scores, so they are not that high a risk right now. Still, their credit probably isn’t as strong as that of the federal government, which guarantees the smaller loans. As a result, those loans, often called conforming mortgages, should have lower rates than those on jumbo mortgages. Indeed, as far back as industry participants can remember, that has been the case.

The fact that jumbos are now cheaper points to dysfunctions in the mortgage market, which is going through a jarring adjustment that appears to be influencing guaranteed mortgages more than jumbo loans.

Read More … 789 more words


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