Morning Report: Jumbo loans remain much cheaper than conforming loans.

Vital Statistics:

 

Last Change
S&P futures 3120 8.25
Oil (WTI) 58.69 0.24
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.94%

 

Stocks are higher this morning on optimism for a trade deal. Bonds and MBS are down.

 

China maintained that tariffs must be cut if there is to be a phase 1 deal before new tariffs go into effect December 15. Chinese officials said the two sides remain in close communication.

 

Despite the weak ADP print yesterday, other labor market indicators look healthy. Outplacement Firm Challenger Gray and Christmas reported that announced job cuts fell 11% MOM and 13% YOY to 44,569. Tech was the biggest sector this month however retail is the leader for the year. Year-to-date, companies have announced 556,000 job cuts versus 1.2 million planned hires. Note that Challenger and Gray only looks at press releases, not actual cuts. Separately, initial jobless claims fell to 203,000 for the holiday-shortened week.

 

The service sector continued to expand, albeit at a slower rate in November, according to the ISM survey. Employment plans accelerated, while production decelerated. “Tariffs are impacting prices for a broad array of products used in the delivery of services and completion of projects for our clients. Upward pressure is impacting suppliers and their pricing to customers. We are seeing no relief from our customers, so we’re being negatively impacted by tariff-driven price increases. Numerous suppliers report looking for alternative manufacturing/supply locations outside of China, but with limited or no success so far.” (Management of Companies & Support Services)

 

The government has ended the limits on VA mortgages, which means veterans can borrow as much as their incomes and credit allow. So theoretically veterans can buy million dollar homes with no money down.

 

Mortgage credit increased in November, according to the MBA, especially in the jumbo space. “Most notably, the jumbo index climbed to yet another record high, as investors increased their willingness to purchase loans with lower credit scores and higher LTV ratios,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Additionally, the government index saw its first increase in nine months, driven by streamline refinance programs.”

 

Speaking of jumbos, the spread between 30 year conforming loans and jumbos remained negative this year, which means jumbo rates are less expensive than conforming rates. This is odd given that conforming loans are government guaranteed and jumbos are not. The spread did rise a bit this year, largely driven by staffing issues. Still, what is going on? According to CoreLogic, an “increase in GSE guarantee fee, a reduction in the GSE funding advantage, and portfolio lenders’ desire to hold jumbo loans explain much of the variation in the jumbo-conforming spread.” The issue of portfolio lenders could be translated to: banks are subsidizing jumbo loans because they are interested in the cross-selling opportunities, especially wealth management services. 

 

jumbo conforming spread.PNG

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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