Though Fannie Mae and Freddie Mac will be allowed to buy bigger loans next year, jumbo lenders say they are not worried about losing borrowers to the conforming market.
In fact, some mortgage experts argue that the planned increase in the conforming loan limit could have the counterintuitive effect of spurring consumers who were already considering jumbo loans - those too large for the government-sponsored enterprises to purchase - to take out even bigger mortgages.
Beginning Jan. 1, Fannie, based in Washington, and Freddie, of McLean, Va., will be allowed to buy loans as large as $322,700, up 7.3% from the previous limit. They announced plans to raise the limits late last month in response to a report by the Federal Housing Finance Board that the average price of a single-family home hit A$235,700 in October, the second-highest average on record.
By Fannie's calculations, 210,000 jumbo loans, or 20% of all outstanding jumbos, will become eligible for refinancing once the new limits go into place.
However, other data suggest that a much smaller piece of the market will be refinanced into conforming loans, and jumbo lenders said they were not worried that the higher conforming limits would increase the prepayment risk of existing jumbo loans by spurring borrowers to refinance out of formerly jumbo loans of between $300,700 and $322,700.
Tom Garvey, an executive vice president in charge of national production at Chase Manhattan Mortgage in Edison, N.J., said that his firm had not found it necessary to change its prepayment model.
Christopher Larsen, the chief executive officer of E-Loan Inc. of Dublin, Calif., said that borrowers who were already interested in five-year hybrid adjustable jumbo mortgages before the loan limit boost was announced would be encouraged to take out loans with even higher principals after the change.
Five-year hybrid jumbos have been carrying rates substantially lower than conventional loans recently and have become very popular, Mr. Larsen said. Last week, for instance, a hybrid adjustable sold for 4.875%, three quarters of a percentage point less than the average 30-year conventional loan. Hybrid loans tend to be priced at lower initial rates than conventional loans before converting to floating rates.
Borrowers get a discount if they take out a jumbo loan, said Steve Majerus, E-Loan's senior vice president of capital markets.
Secondary market investors are willing to pay a premium for jumbo loans, because they believe they can cross-sell other financial products and services to the borrowers, who tend to be more affluent and thus are considered more desirable, Mr. Majerus said.
