What's with the higher rates for jumbo loans? 

I posted an article called No Mo' Jumbo? Higher Mortgage Loan Limits from Congress to President. Scott Wall was kind enough to pay me a visit and add his comment. Here's what he had to say:

"I think the whole concept of jumbo loans is silly. I know that their is potential more risk, but loaning $300k or $800k, lenders look at the basic same things. I think lenders are just trying to justify the ridculously higher rates." 

Let's explore this a bit.

Let's say you owns a company that sells two thingamahoozits...one is red and the other is blue.

After a while, you notice that 1 out of 10 blue thingamahoozit customers don't make good on their monthly payments (it's common, in the Thingamahoozit industry, to have a finance plan).

But with the red thingamahoozit you notice a higher default rate...more like 3 out of 10.

In order to stay profitable, you might start asking for a bigger downpayment on the red thingamahoozit and charge a bit more on the price...to make up for whatever losses.

That's jumbo loans. Just like the red thingamahoozit, there are more defaults then with the conforming, conventional loans. (Conforming limits are presently $417,000) It's simply a riskier loan to hand out, and you gotta cover that risk somehow.

If lenders just wanted to justify the higher mortgage rates, then why were the rates on jumbo mortgages essentially the same with most loan products in the middle of the boom 3 years ago? The reason is that there was little difference between jumbo loan defaults and conforming loan defaults for years. People forgot there was such a thing as foreclosure. You could just sell or refinance.

Jumbo mortgage rates wer lower back then because the lenders miscalculated the risk. Or were they more affordable because of the greed of mortgage companies? That's the big question right now with all manner of the risky loans that were readily avaialable during the real estate market boom.

At any rate (get it?), the cost of mortgages can't really be called "ridiculously higher." I haven't seen jumbo rates over 7.5% even with all the foreclosures. 7.5% is a low interest rate, unless you're used to ridiculously low interest rates.

And let's face it: we got used to ridiculously low interest rates for thingamahoozits. I mean mortgages.

Joey Aszterbaum is the Hemet Home Loan Guy and a member of the Active Rain social network of real estate professionals. To buy or refinance your home in Hemet, Riverside County, or California visit www.HemetHomeLoans.com or call 951.571.5751