Rates Come Down On Jumbo Mortgage Loans | WAMU 88.5 - American University Radio

Rates Come Down On Jumbo Mortgage Loans

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There is something new and different for home mortgages: Jumbo loans are being made at lower interest rates than traditional home loans. That's kind of like a first class airplane ticket being cheaper than riding in coach.

At first this seems crazy. For as long as anybody can remember, homeowners have had to pay a premium to get jumbo loans. That's because they're not guaranteed by the federal government. If they're not guaranteed, they're riskier, so they cost more in interest payments.

"That's the old math," says Scott Simon, who for many years was one of the biggest mortgage traders in the world. "In the new world, that doesn't have to be true."

Simon, who worked for investment firm Pimco, says right now banks are making most of those jumbo loans only to the very best customers — wealthy people with perfect credit, who can put a lot of money down.

So cutting them a good deal isn't crazy.

"These are incredible borrowers and the banks want to do business with these people because they can do so much other business with them," Simon says.

Meanwhile, big banks have more cash on hand to loan out to these very best customers.

And also, the government controlled mortgage giants Fannie Mae and Freddie Mac have been ratcheting up fees they charge to guarantee those traditional loans for the rest of America. That pushes up interest rates for average people who take out those smaller traditional loans.

"I'm not sure it's a good thing or a bad thing," Simon says. "What it's gonna do is make Fannie and Freddie incredibly profitable."

That profit will flow back to the U.S. Treasury, which controls Fannie and Freddie. So Simon says it won't be long before Fannie and Freddie have handed over more money to the government than it cost taxpayers to bail them out.

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