HUD launches ad campaign to fight lending discrimination
MBA VP of of research and economics Brinkmann testifies on the impact of the conforming loan limitMortgagePress.comMBA, Jay Brinkman, Committee on Financial Services, jumbo loans, conforming loan limit Jay Brinkmann, vice president of research and economics for the Mortgage Bankers Association testified before the Committee on Financial Services. In his testimony, Mr. Brinkmann discussed the impact of the higher conforming loan limit and the efforts to improve jumbo loan pricing. Below is Mr. Brinkmann's oral testimony, as prepared for delivery. "Mr. Chairman, Members of the Committee, thank you for the opportunity to testify. "My message this morning is that pricing in the jumbo loan market is improving as a result of actions taken by this committee, Congress, the White House, mortgage lenders, the GSEs and FHA. 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. 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. "First, when the higher loan limits were announced by HUD at the beginning of March, the capital markets were caught up by the developments at Bear Stearns. Broker/dealers on Wall Street, who would normally bid on GSE securities, needed to conserve cash and could not commit to a price on a new security when they did not know if or for how much they would be able to sell it. Mortgage lenders could not commit to a lower rate on a mortgage until they saw what investors were willing to pay for that mortgage. "Second, the pricing of the new GSE jumbo securities was complicated by the fact that there were different limits for different parts of the country with different home price trends and different prepayment speeds, thus making it difficult to commit to a generic price. For example, loans in New York traditionally prepay at slower rates than loans in California and are therefore worth more to investors. "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 places. 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 market price. Therefore, they would demand a higher yield to compensate them for the likely illiquidity. "What finally broke the logjam was the courageous move by Fannie Mae and Freddie Mac to simply announce a price at which they would buy jumbo loans that qualify for their programs. The establishment of a credible bid in the market has already led to greater interest among private investors. "Keep in mind, however, that not every jumbo loan will be coming down in rate. The limited geographic coverage of the bill and the level of the loan limits exclude about half of the jumbo market that we saw for home purchases in 2006, and given the credit standards of the GSEs, credit standards that reflect the current environment, only about half of that number would likely qualify for GSE purchase. Therefore, borrowers will see a range of quotes for jumbo loans based on where they live, the amount of their down payments and other credit factors. So a jumbo loan in an area that is not designated a high price area will likely cost more than an identical jumbo loan in a high price area as determined by HUD. "In addition, the jumbo loan market is not traditionally a 30-year fixed-rate market, with those loans making up roughly only a third of the jumbo market over the last five years. That has now changed with applications for fixed rate loans making up about 70% of jumbo applications, but jumbo to conforming spreads on loans like 5/1 hybrids have not been as wide as those for 30-year fixed-rate loans so there are good alternatives for jumbo borrowers. FHA insured loans are also playing a very important role. The demand for Ginnie Mae securities never really slackened and the efforts of FHA to roll out its program and risk-based pricing have made FHA loans a cost-effective choice for many borrowers. "I said at the beginning that the efforts to improve jumbo pricing are working. The Mortgage Bankers Association conducts a weekly survey of mortgage applications around the country. As recently as March of 2007, applications for jumbo loans made up 12.1 percent of all applications. By March 2008, the jumbo share had fallen to only 4.4 percent. As of the first few weeks of May, that share has increased to 5.8 percent and we expect that percentage to continue to increase. Mr. Brinkmann's full written testimony can be found at www.mortgagebankers.org.