When it comes to real estate loans….well, it's been a roller coaster ride for the past two years!!

The mortgage market of today can be described as having three distinct categories;

The first is what we always hear about…….Conforming loans…….Conforming loans are loans that meet the guidelines of Fannie Mae and Freddie Mac, including the loan limit size of $417,000.  When you hear about rates in the media they are usually talking about conforming fixed rate loans.  For borrowers that qualify, the standard 80% Loan To Value loan with documented income and assets plus a credit score of 720 or higher on single family homes have the lowest rates.  Rates for these loans have been hovering around 4.75% over the past couple of weeks.

The part of the story that is unreported is that variations to this standard, such as a lower credit score or a condo, second home or investment property instead of a single family can add to the rate…..

The next category of mortgage loans is what is referred to conforming “high balance”  loans.  These are loans that are also underwritten to Fannie Mae and Freddie Mac standards and are available up to a maximum of $729,750 in high cost areas, such as the bay area. Under current law that limit is set to expire at the end of 2009.  Conforming “high balance “ loans may have more restrictive underwriting requirements than standard conforming loans and carry a premium added to price.  Rates for conforming “high balance” loans are generally about  a half a percent higher than standard conforming. High balance rates have been in the low to mid 5% range for the past couple of weeks.

Jumbo loans are loans that exceed $729,750 and are also sometimes referred to as “non conforming” loans. Ever since the sub prime melt down of 2007 the market for these loans is very limited…..essentially there is virtually no secondary market for the resale of  jumbo loans which means that when a lender makes this type loan they have to hold keep it in their portfolio.  We’ve all heard about the liquidity issue with banks today…..holding loans that have the stigma of high risk is not on most banks agenda.

This chart shows how the "rate spread" between conforming and jumbo loans. As you can see the spread has grown form an "historical" .375% to well over 1.50%.

The lack of a vital secondary market for jumbo loans has a lot to do with the dropping median price of homes….if the average buyer finds jumbo loans difficult and expensive with high down payment requirements they tend to stay out of the million dollar plus home market. 

Take a look here at how the number of Jumbo Loans has decreased since mid 2007.

On the supply side, only those buyers that must sell put their home on the market and on the demand side there are fewer buyers, so pricing is competitive…….

The fed is fueling the secondary market for conforming loans by buying mortgage back securities issued by Fannie Mae and Freddie Mac. Until market confidence returns and a secondary market for jumbo loans is reestablished the sale of million dollar plus homes is likely to languish…….so what we have is that a preponderance of homes that are being sold are in the under $750,000 price, thus the median continues to drift lower…

 That’s the state of affairs in the mortgage market as I see it…..…of course there are a variety of other types of loans, such as FHA and VA……there is also mortgage insurance that will allow qualified borrowers to get conforming loans up to 90% of value.

There are plenty of buyers and inventory continues to shrink in the under $750,000 price point in the Bay Area…..since there is a limited supply of above million dollar priced homes on the market sellers are well advised to price to the market and do all recommended pre listing improvements plus staging.  Homes that are presented to sell  at an attractive price bring in buyers and multiple offers are being seen even in the higher price ranges.

We are seeing general market improvement every week….if you have questions about whether to buy, sell or refinance and are in the San Francisco Bay area….get in touch with me by phone at 650 325 7877 or email me at russ@bayareateam.com.You can search for Bank owned and short sale homes listed in the multiple listing service in the bay area by visiting www.allbayareabankowned.com .  My home loan website is www.bayareateamhomeloans.com.