Aug 24, 2007

jumbo indeed

Amazing graph of a the interest rate on two 30 year fixed rate mortgages. One conforming and one non-conforming. In other words one for homes less than $417K and one for homes costing more. You can see the 'repricing' of risk that I wrote about in my last post on this subject.

It's not that the rates went up. It's that the rates on nonconforming (or jumbo) jumped so much more than a conforming mortgage. The spread used to be 20 basis points and now it's 100.

No one wants risky loans any more. I'd put a sub-prime mortgage plot on this graph except they don't exist anymore. Here's a narrorower time frame where you can more easily see the deviation in spread. One would expect this spread to narrow over time because historically it is generally not this wide. I'm wondering who is making that risky bet in their fund right now (a hedged long non-conform, short conform bet).

I also have an interesting anecdotal story. A colleague of mine just headed over to the UK to work. He's been a housing bear since I met him in 2004. Ironically he had to sell his house because of the move. But he can't. He's willing to drop the price but all the people looking at his home cannot put 20% down. And the mortgages would be non-conforming. There just are no potential buyers at all.

No comments: