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‘Jumbo’ Mortgages Receive a Boost in Securities Market
The Securities Industry and Financial Markets Association (SIFMA) announced last week that it will allow newly authorized "conforming jumbo" home loans in high-cost markets to be included in the to-be-announced (TBA) market for mortgage-backed securities.
Conforming loans are those eligible for purchase by Fannie Mae and Freddie Mac. The decision will apply to higher balance government-insured or guaranteed loans eligible for Ginnie Mae pools.
The move is expected to lower the interest rates on these mortgages, which are prevalent in California and other parts of the country where home prices are high.
The to-be-announced market is where contracts are made to buy or sell mortgage-backed securities that will be delivered at a future date. The TBA market plays a vital role in financing housing by allowing lenders to sell their loans in advance and, based on that price, to determine the loan rate charged to borrowers.
Traditionally, this market has been confined to conforming loans below $417,000 (the national conforming loan limit) to provide investors confidence that they are purchasing pools of loans that have the same basic characteristics. Ginnie Mae securities backed by FHA-insured or VA-guaranteed loans with balances below the previous national FHA ceiling are also TBA-eligible.
While the FHA and conforming loan limits for high-cost areas were temporarily increased to $729,750 in the economic stimulus package signed by President Bush in February, SIFMA recommended that these higher balance loans be pooled separately, partly because the increase expires at the end of this year and there were concerns that including them could increase rates for lower balance conforming loans.
After enactment of the Housing and Economic Recovery Act of 2008, H.R. 3221, which permanently increased FHA and conforming mortgage limits for high-cost areas, up to a maximum of $625,500, SIFMA revised the question of TBA eligibility for higher balance loans. The association considered three different options: full inclusion, exclusion or a compromise option, recommending that higher balance FHA and conforming loans can comprise up to 10% of a TBA-eligible mortgage pool.
“We expect higher balance borrowers to receive both rate relief and increased liquidity as was desired in the legislation, while retaining the overall liquidity of the TBA market,” said Sean Davy, managing director at SIFMA. “This arrangement 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 elaborated, noting that, “We expect the market to smoothly digest the change made under the new SIFMA guidelines and continue to provide liquid and efficient pricing for mortgage securities. The importance of preserving the liquidity and stability of the TBA market cannot be overstated.”
The new TBA requirements will be published in an updated version of SIFMA's Good Delivery Guidelines for Fannie Mae, Freddie Mac and Ginnie Mae Securities and will not be effective until the new loan limits go into effect on Jan. 1, 2009.
To read H.R. 3221, click here and enter the bill number in the box at the center of the page.
For more information, e-mail Michelle Hamecs at NAHB, or call her at 800-368-5242 x8425.
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