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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (14909)	11/8/2003 7:09:31 PM
From: Elroy Jetson	Read Replies (2) \| Respond to of 306849

The Fannie Mae subsidy (about 10%) can be judged by the increased interest rates charged for "jumbo mortgages" over "coventional mortgages". From this website compare current "no-point" APRs on "3/1 variable" vs "fixed rate" for both Jumbo (free-market) and Conventional (subsidized) loans. dcu.org Conventional-Variable___4.14%___(-0.22% = 3.92%) Jumbo-Variable________4.32% Conventional-Fixed______6.28%___(-0.22% = 6.06%) Jumbo-Fixed___________6.78% Nominally, the free-market (jumbo) fixed rate loan costs an extra half point compared to subsidized (conventional loans). But lending costs are a smaller percentage of a larger loan and thus more profitable by roughly 220 basis points so we are comparing apples to oranges. Taking this into account the current Fannie Mae subsidy is (0.72% on 6.78%) or 10.6% for fixed rate loans and (0.40% on 4.32%) or 9.3% for variable rate loans. So without Fannie Mae, market-rate "conforming" loans would cost 10.3% more for variable loans and 11.9% more for fixed loans. More to the point, if the bulk of the market were not absorbed by Fannie Mae and friends it is unlikely that there would be a sufficent secondary market to be able to offer fixed rate loans at the current spread over varibale rate loans. Our loan products would more closely resemble Australia or the US prior to Fannie Mae where "fixed rates" are only offered for up to five years for an extra 100 basis points. As a matter of background, the Secondary Market for Jumbo loans is made up of companies like Bear-Stearns, Lehman Bros, Goldman Sachs etc. Like Fannie Mae, they sell Collateralized Mortgage Obligations (uninsured or insured by private companies). They often break the CMOs into two products, tranches of fixed duration and the residual. The fixed duration product finds buyers among pension and insurance firms. The residual is a toxic waste product whose price can fluctuate wildly.