MBA Expert: Higher Loan Limits Help Jumbo Loan Market
Thursday, May 22, 2008
Jay Brinkmann, vice president of research and economics for the Mortgage Bankers Association (MBA), told the U.S. Committee on Financial Services Thursday that the jumbo loan market is experiencing a welcomed dose of new activity because of a recent decision to increase the conforming loan limits for Fannie Mae and Freddie Mac.
“The higher loan limits have allowed lenders to make loans to jumbo borrowers during a period of time when the secondary market remains effectively shut down for all but Fannie Mae, Freddie Mac and Ginnie Mae securities,” said Brinkmann. “It has taken some time, however, since the passage of the bill for us to see lower pricing in the jumbo market for a number of reasons.”
Brinkmann told the committee that the changes took a while to catch on because of current market conditions. Part of the problem was the fact that different parts of the country have different home price trends which essentially makes it harder for those markets to commit to a standard price, Brinkmann said. In addition, the loan limits were announced at a tumultuous time when capital markets were still dealing with the fallout of Bear Stearns and preserving their cash.
Brinkmann said, “Third, the temporary nature of the higher loan limits makes the securities potential orphans in that new issuance will come to an end shortly after the end of this year. Pricing of securities is generally determined by the most recently issued securities where the most trading takes place. In the absence of the prospect of new issuance, potential investors feared having to hold an illiquid security that they could not sell because they could not get a reference quick price.”
Brinkmann concluded his speech saying what finally encouraged investors to take a risk in the jumbo side of the mortgage market was the decision to increase the GSE's conforming loan limits.
“The higher loan limits have allowed lenders to make loans to jumbo borrowers during a period of time when the secondary market remains effectively shut down for all but Fannie Mae, Freddie Mac and Ginnie Mae securities,” said Brinkmann. “It has taken some time, however, since the passage of the bill for us to see lower pricing in the jumbo market for a number of reasons.”
Brinkmann told the committee that the changes took a while to catch on because of current market conditions. Part of the problem was the fact that different parts of the country have different home price trends which essentially makes it harder for those markets to commit to a standard price, Brinkmann said. In addition, the loan limits were announced at a tumultuous time when capital markets were still dealing with the fallout of Bear Stearns and preserving their cash.
Brinkmann said, “Third, the temporary nature of the higher loan limits makes the securities potential orphans in that new issuance will come to an end shortly after the end of this year. Pricing of securities is generally determined by the most recently issued securities where the most trading takes place. In the absence of the prospect of new issuance, potential investors feared having to hold an illiquid security that they could not sell because they could not get a reference quick price.”
Brinkmann concluded his speech saying what finally encouraged investors to take a risk in the jumbo side of the mortgage market was the decision to increase the GSE's conforming loan limits.
