Mike’s Real Estate Show

Why the big difference in conforming and jumbo rates?  Short answer: The greater the risk, the greater the rate will be charged. 

 Here’s one reason why jumbo loans are considered a greater risk. 

Conforming loans are loans that meet the loan limit and lending terms for Fannie Mae and Freddie Mac. 

These are government sponsored enterprises (GSE) and they help to provide liquidity in the mortgage market by providing a secondary market to banks, thrifts and other mortgage originators.  When a loan is sold, Fannie Mae and Freddie Mac are guaranteeing that a loan will be repaid in full as long as the original lender met their requirements.  This makes it of less risky for investors to buy and sell these loans that are backed by Fannie Mae and Freddie Mac.  Currently in California the maximum loan amount for a conforming loan is $417,000.

  Jumbo loans, loans greater than $417,000, on the other hand, don’t have the security of a GSE behind them.  With the recent mortgage issues, jumbo loans are being seen as an even greater risk.  Jumbo loans in general have had a higher rate associated with them and though currently the spread is even greater as the risk, or perceived risk, to investors is greater.