A queer thing happened on the way to the mortgage market last week: For the first time, the price of a conforming loan exceeded the price of a jumbo loan.

According to the Mortgage Bankers Association’s weekly survey, for the first week of September the average interest rate for 30-year fixed-rate conforming mortgages (that is, those for less than $417,000, which means they may be purchased by Fannie and Freddie) was 4.73 percent. The average interest rate for jumbo 30-year fixed-rates (those with higher balances, such as luxury homes) was 4.71 percent, a difference of two basis points.

That a fully government-backed loan should ever be more expensive than one in which the issuing bank is retaining all the risk is a bit of a head-scratcher. But the unusual phenomenon may merely be a symptom of the current foggy state of the mortgage markets, observers say.

First of all, there’s less to the rate switch than meets the eye. While on paper the average rates for jumbos might have slipped below the average rates for conforming loans, the rates offered to any given borrower will vary considerably with their personal credit history, and in the majority of cases conforming loans will still be cheaper.

“Mortgages are like fingerprints: No two are the same. It really depends on the person and their situation. [The convergence between the rates] is really a bank phenomenon, because their costs of funds are so low. In some cases we see [jumbo rates] about an eighth lower,” said Amy Tierce, president of Fairway Independent Mortgage in Needham.

In most cases, that’s not enough to advise a borrower to seek a jumbo instead of a conforming, Tierce said, because in order to qualify for a jumbo “down payment requirements are higher, credit score requirements are higher, reserve requirements are more restrictive,” she said.  “I would never encourage a borrower to pay more [down] to get an eighth lower in rate.”

Tighter Standards

While qualifying for a jumbo has always been harder than for a conventional loan, many investors have tightened their underwriting standards significantly since rates began their recent spike.

“The secondary market has definitely tightened up and become harder to work with,” said Brian Koss, managing partner of Danvers-based The Mortgage Network. “Non-bank investors have become much more conservative since the rate move in July.”

In general, the tighter a lender’s underwriting standards are, the more sterling a borrower’s credit must be to meet them, and the lower the rate available to the borrower. So the convergence between the jumbo and the conforming rates may simply be a sign that jumbo mortgages are even harder to obtain – a potential blow to the Boston housing market, where home prices can easily exceed conforming loan limits.

Reports this week that the federal government intends to lower the conforming loan limit later in the year will only make the situation worse. The loan limits were intended to make sure that Fannie and Freddie’s market muscle wasn’t being used to make luxury home purchases cheaper. During the housing crisis, federal regulators loosened the restrictions, raising the conforming loan limit in many high-cost markets in order to make it easier for borrowers to obtain loans. Boston was one of the primary beneficiaries of the policy, with homebuyers in the Greater Boston area able to obtain conforming loans for up to $465,750 while Martha’s Vineyard and Nantucket buyers could obtain conforming loans for as much as $625,500.

Regulators may intend the move to be a gentle nudge in Wall Street’s ribs, expanding the number of loans which require private investors. A spokesperson for the Federal Housing Finance Agency, which oversees Fannie and Freddie, told the Wall Street Journal a reduction in loan limits would be “an appropriate and effective approach to reducing taxpayers’ mortgage-risk exposure,” that would expand “the role of private capital in mortgage finance.”

But with investors so skittish, even a slight decrease in the limits may only mean borrowers have a tougher time obtaining loans, helping to cool the formerly-strong housing recovery, Koss said.

“I think a lot of people got burned on Wall Street [when rates increased] and it’s caused a real pullback,” Koss said. “There’s a feeling of illiquidity and uncertainty [in the markets] … a real decrease in confidence.” 

Email: csullivan@thewarrengroup.com