Thursday, August 14, 2008

Jumbo Rates May Fall as Larger Mortgages Enter Market

(Bloomberg) -- Jumbo mortgage borrowers may pay lower interest rates after a trade group loosened restrictions on a market for Fannie Mae and Freddie Mac mortgage bonds to combat the housing slump.

The Securities Industry and Financial Markets Association will permit the larger loans that Fannie and Freddie will be financing to be accepted into the main market for mortgage bonds in limited amounts. That may boost rates on loans of less than $417,000 and cut the costs of some larger, or ``jumbo,'' loans.

Revised guidelines for the so-called To Be Announced market will permit securities composed of as much as 10 percent of the bigger loans, New York-based Sifma said in a statement today. Lawmakers, seeking to boost the housing market, last month expanded the ability of government-chartered Fannie and Freddie to guarantee certain jumbo loans.

``We expect higher balance borrowers to receive both rate relief and increased liquidity as was desired in the legislation,'' Sean Davy, a managing director at Sifma, said in the statement today.

Sifma, the largest Wall Street lobbying group and a successor to the Bond Market Association, sets the rules for the TBA market, where offers to buy or sell securities may be filled with debt with a range of characteristics.

Fannie Mae rose 46 cents, or 6 percent, to $8.10 in composite trading on the New York Stock exchange as of 1:42 p.m. Freddie Mac rose 40 cents, or 7.2 percent, to $5.95.

Yield Spread
The difference between yields on 10-year U.S. Treasuries and Fannie's current-coupon, 30-year mortgage securities was little changed after the announcement, at 2.15 percentage points, according to data compiled by Bloomberg. Similar rules will be adopted for Ginnie Mae securities, Sifma said.

The 10 percent limit ``preserves the overall homogeneity of the market while at the same time minimizing the risk of a negative impact on mortgage rates for lower balance loan borrowers, or, potentially, all borrowers,'' Davy said.

Rates on typical 30-year fixed-rate mortgages yesterday averaged 6.43 percent, while the cost of jumbo loans larger than Fannie and Freddie can finance was 7.5 percent, according to data. The companies earlier this year offered to purchase jumbo loans that they can finance under the February law at the same prices as smaller loans, after U.S. Representative Barney Frank complained lawmakers hadn't gotten enough ``bang for the buck.''

Sifma Options
Sifma considered accepting larger loans without limits for individual pools as well as excluding the loans, according to UBS AG analysts. The first option may have increased the sensitivity to interest-rate changes of TBA bonds and hence reduced prices, further boosting smaller-loan rates. Excluding the loans, which was Sifma's ruling when the standards for Fannie and Freddie were first relaxed by Congress in February, hindered the benefits to jumbo borrowers, Fannie and Freddie executives have said.

The National Association of Realtors had lobbied Sifma to allow the inclusion of larger loans in an Aug. 9 letter, saying the ``very favorable pricing'' the liquidity of the TBA market produces was needed to bring down large-loan rates. The group said it would accept some limits on their inclusion.

Washington-based Fannie and Freddie of McLean, Virginia, were temporarily allowed to buy or guarantee loans as large as $729,750 in high-cost areas under an stimulus bill passed in February. Under the new law, Fannie and Freddie won a permanent right to finance loans of as much as $625,500 in more expensive areas, starting next year.

Larger Loans
Sifma had said one reason it didn't allow larger loans into the TBA market after February law was because the previous legislation covered only mortgages from mid-2007 to yearend.

The rule change won't permit banks to package older mortgages into TBA-eligible securities, according to a separate e-mail from Sifma to members.

Limits for Federal Housing Administration loans, the main Ginnie collateral, also rose permanently, to the lesser of 115 percent of an area's median home price and 150 percent of the current base limit of $417,000.

TBA mortgage bonds will be worth about 5 cents to 9 cents less per $100 of principal as a result of the change ``depending on coupon and program,'' Citigroup Inc. analyst Brett Rose wrote in a note to clients today.

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