Repricing of risk, not a bad thing

from “D”

“This goes along with my comment yesterday about the repricing of risk. It’s not a bad thing.

This concern about jumbo mortgages costing 6.8% or 7.5% is actually funny because for most of the 1990s boom, and well into the 2000s, interest rates were exactly at these levels!

When I bought my condo in October 2000 guess what my interest rate was – about 6.75%! Of course I refinanced in 2003 when rates bottomed out. People have forgotten that for much of history rates were more between 5% and 8% then 4% – and that during the boom years of the 1990s rates were higher than they’ve been since 1/1/2000!

See the attached chart of the rate on a 30 year fixed. I ran the data from 12/31/1994 to yesterday, daily readings.


I don’t have access to 5 year ARMs data but 30 Year Fixed are always a little higher so that would mean that the exotics were a few basis points lower. But, the chart makes the point…”

We would have to agree. Thanks for the information.

Mortgage Reportage [theFrontSteps]

7 thoughts on “Repricing of risk, not a bad thing

  1. Sure, the repricing of risk is not a bad thing for you. Your condo price from 2000 was probably half what it is today and your refi when the fed funds rate was at 1% means your payment is squat. For those of us looking today, it’s actually really bad. 75 basis points in 2 weeks is painful. And you need to look beyond the comparison of average rates (as your chart does above) and look at underlying terms too.

    First, your chart is for conforming loans (irrelevant chart for SF) and jumbos is where all the pain is today. Second, lenders are simply choosing not to fund certain loans at all. The average rate doesn’t mean squat if people are simply turned away at the bank. Finally, higher LTVs are now having a hard time getting funded. Even if the rate drops to 6%, that won’t matter if banks reject a 5% or 10% downpayment.

    I’m trying to close on a place now with 10% down and the rates are freaking horrible. My payments are probably going to be $500/month than they would have been in May. So, I repeat, it may not be bad for you but it really sucks for me (and other buyers).

  2. Dave: Thanks for your comment. Sadly, my place was not half of what it would sell for today. Jumbos are usually lower than the 30 Year Fixed which is why I looked at the rate of the conforming 30 year fixed as a proxy. The problem now is that it is in fact the terms that are changing, as you note. Those terms, like 5% or 10% down were not available seven years ago when I bought my condo. It was 20% down and 6.75%. That was painful and it hurt, and it still does. It’s still a lot now. What came with the opening of the money spigot in 2003 was the removal of the terms like 20% down and their replacement with 10%, 5% and 0% down. That is, as you note, going away. However, it was the arrival of those terms back then that has made it so tough now as the risk those terms created has turned out to have been a bad bet for lenders – and helped cause the current difficulties you are facing.

  3. Actually, it’s the other way around. Jumbos are typically higher than conforming, not lower. There are two primary reasons for this: one is that the bank is lending you more and simply charging you a higher premium due to the fact that more of their capital is at risk. Two is that non-conforming Jumbos cannot be sold to Freddie/Fannie and must be purchased on the secondary market, which is not as liquid and not “guaranteed” by a quasi government institution.

    I don’t know if this link will actually work, but plot a 30 yr fixed conforming versus a 30 year fixed jumbo and you’ll see a consistent spread. The gap has widened dramatically between the two, with jumbos spiking toward 7% in the last couple weeks. The market is experiencing a flight to quality and investors are afraid of non-conforming loans independent of credit quality… Hopefully (for me) it is short-lived, but the trend is not my friend.

  4. D

    I too find no humor in the concern about increasing interest rates on a jumbo mortgage. To properly evaluate the impact of this increase you also have to consider the average purchase price and evaluate the ease with which this is absorbed by a buyer/mortgagee. If the same condo/home purchased in the 1990s or early 2000s was the same price today, then we would have apples to apples. I would guess that at today’s price with this same 7.5% jumbo mortgage the property most probably would be unobtainable for those who pushed themselves at that prior point in time. And then there are taxes and insurance, all based on this new higher purchase price. There has to be something left for quality of life. I think this is where we get a little jaded by the San Francisco market. Jumbo mortgages are indeed higher than conventional mortgages. Since many buyers are hard pressed to come up with even 20% for a down payment, jumbos are their only option for conventional financing.

  5. According to, they are over 6.9% today.

    IMHO, the “big deal” is that this is up a full percentage point in the last six months, which means an extra 500 bones a month on a $1m place. That’s not nickels and dimes.

    The other “big deal” is whether or not you can get a deal funded at all. One can dismiss all the “marginal” buyers out there but the marginal buyer is the norm in SF. The average downpayment is far less than 20% and options for that type of buyer are drying up…

    We’ll see what happens. It looks like the Fed is waking up today and trying to keep the pendulum from swinging too far in the irrational direction.

  6. Dave – Don’t worry. I suggest you actually call your local bank and ask what a 30-yr fixed jumbo is. It’s about 6.5% clean. 5yr ARMS P&I are at 6-6.125%.

    You think the average SF buyer is marginal? I beg to differ. I hope you are not using the median income earner is buying the median home price argument, b/c it’s just not true. ‘

    Flushing out the true marginal buyers who shouldn’t be buying in the first place is a fantastic thing for the medium to long run.

    I will certainly try and take advantage of any distressed sales in good areas in 4Q. But, the problem is, the price has to be at least 10-15% below recent comps, b/c prices are up 5-10% this year in SF already.


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