Most rates decline, but jumbos rise
By Holden Lewis • Bankrate.com

This is the week of the asterisk. Barry Bonds' 756th home run gets an asterisk, and mortgage rates get an asterisk, too.

Rates on conforming mortgages fell this week, for the third week in a row. Conforming mortgages are home loans within the maximum loan size that Fannie Mae and Freddie Mac may buy -- $417,000 this year.

Loans for more than the conforming limit are called jumbo mortgages. That's where the asterisk comes in: Even as rates on conforming loans settled lower, rates on jumbo mortgages have risen sharply in the last week or two.

The benchmark 30-year fixed-rate mortgage fell 5 basis points to 6.66 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.25 discount and origination points. One year ago, the mortgage index was 6.57 percent; four weeks ago, it was 6.78 percent.

The benchmark 15-year fixed-rate mortgage fell 5 basis points to 6.33 percent. The benchmark 5/1 adjustable-rate mortgage rose 19 basis points to 6.55 percent.

The jumbo 30-year fixed-rate mortgage skyrocketed, climbing 22 basis points to 7.35 percent.

Weekly national mortgage survey

Results of Bankrate.com's Aug. 8, 2007, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

The jumbo 30-year fixed-rate mortgage
In a normal market, rates for jumbo loans tend to move in the same direction as rates for conforming loans. But credit markets have been abnormal lately. Similar to a pair of magnets with like poles pushed together, jumbo and conforming rates are repelling each other. Rising jumbo rates have helped push conforming rates lower and vice versa, until they reach an equilibrium that changes frequently.

Jumbo rates are rising because investors now believe that borrowers are going to default in bigger-than-previously expected numbers. That's a problem all by itself, but it's made worse by uncertainty over the extent of the problem. The most troublesome jumbo mortgages come from borrowers who got the big loans without documenting their incomes. Investors don't know how many of these stated-income mortgages are in each loan pool, so they have trouble estimating the extent of the risk.

In the argot of Wall Street, the market has trouble differentiating asset quality. Mortgage investors are like pet owners who fear that some brands of dog food have poisonous plastic pellets from China, but they don't know which brands are safe and which are unsafe.

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Risk raises rates
Since investors now are unsure about the riskiness of jumbo mortgages, they'd rather avoid the transactions altogether. They demand higher returns to compensate for the risk, and that's why jumbo rates are rising.

Meanwhile, investors are reacting to the jumbo imbroglio by rushing to the relative safety of plain-vanilla conforming mortgages, for which borrowers documented their incomes. In exchange for taking on less risk, they accept lower returns -- and rates on conforming loans decline.

"The conforming has gone down because there hasn't been a strong correlation between delinquencies and your Fannie and Freddie deals," says Jim Sahnger, mortgage consultant for Palm Beach Financial Network in Stuart, Fla. With jumbo loans, it's difficult for investors to figure out what they're getting. "It's easier to walk away than to take it," Sahnger says. Reluctant investors lead to higher rates.

Mortgage brokers do business with multiple lenders, and they say the magnitude of the increase varies a lot from jumbo lender to jumbo lender. Some lenders increased rates and some increased rates and fees.

"I've never seen anything like this in my life," says Bob Moulton, president of Americana Mortgage. He has been a mortgage banker for decades. "We had borrowers that were looking to borrow stated-income jumbo. I quoted him 7 percent Monday, and on Thursday, when I tried to lock him in, the rate was 13 percent."

As for jumbo loans in which the borrower documents income and assets: "Sold. Send them to me," Moulton says. "The traditional transactions, where they can document income and have good credit -- not a problem."

Not all mortgage providers have an easy time placing fully documented jumbo mortgages. But even Moulton has trouble finding lenders for jumbo borrowers who don't want to document income and assets. "That's where the fear is. The whole market is being governed by fear."

Sahnger believes the panic will end someday. "Give it 30, 60, 90 days for the hysteria to work off, and we'll see where the mortgage market stands," he says.