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Rates for mortgages backed by Fannie Mae and Freddie Mac continue to ease as the Fed takes a breather from rate hikes, but homebuyers are paying more for jumbo mortgages that exceed the mortgage giants’ conforming loan limits.

Borrowers were locking rates on 30-year fixed-rate conforming loans at an average of 6.65 percent Tuesday, down from a 2023 high of 6.85 percent seen on May 26, according to the Optimal Blue Mortgage Market Indices.

That’s despite tough talk on inflation from Federal Reserve Chairman Jerome Powell, who warned lawmakers Wednesday that if the economy stays on its current course, the Fed will probably need to hike rates again and keep them elevated for some time.

It was essentially the same guidance Powell offered last week after Fed policymakers voted to skip a rate hike in June but keep the door open to future rate increases.

While rates on 30-year fixed-rate conforming mortgages have continued to retreat in the wake of last week’s Fed meeting, jumbo loans are another story. According to Optimal Blue data, rates on jumbo mortgages were averaging 7.2 percent Friday, a new 2023 high.

MBA Deputy Chief Economist Joel Kan said tighter liquidity conditions have prompted jumbo lenders to pull back, increasing rates in the process.

The MBA’s weekly survey of lenders showed applications for purchase mortgages were up by a seasonally adjusted 2 percent last week compared to the week before, but down 32 percent from a year ago.

Joel Kan

Kan said the increase in purchase loan demand was driven by a 2 percent gain in applications for conventional mortgages and a 3 percent increase in requests for FHA-backed loans.

“First-time homebuyers account for a large share of FHA purchase loans, and this increase is a sign that while buyer interest is there, activity continues to be constrained by low levels of affordable inventory,” Kan said.

Fannie Mae economists warned in March that stresses on regional banks sparked by the failures of Silicon Valley Bank, Signature Bank and First Republic Bank could make jumbo loans exceeding Fannie and Freddie’s $727,200 conforming loan limit harder to come by.

“Unlike conforming loans, which are largely financed through mortgage-backed securities (MBS) via capital markets, the jumbo mortgage space is almost entirely funded via the banking sector, and some regional banks are more concentrated in jumbo mortgage lending than others,” Fannie Mae forecasters warned. “Ongoing liquidity stress could limit home financing and therefore sales in the related market segments and geographies with high jumbo concentration.”

Powell testifies before Congress

In delivering the Federal Reserve’s semi-annual Monetary Policy Report to members of the House Financial Services Committee Wednesday, Powell also fielded concerns from committee members about its supervision of lenders.

The Fed will release the results of its annual stress tests of large banks on Wednesday, June 28. This year’s test evaluated how 23 big banks would fare in the event of a “severe global recession with heightened stress in commercial and residential real estate markets.”

Some Republican lawmakers have fretted that the Fed is preparing to impose new requirements on smaller lenders. The Fed’s recently appointed vice chair for supervision, Michael Barr, is leading a “holistic review” of capital standards that may affect small and midsized lenders.

Rep. Patrick McHenry, the North Carolina Republican who chairs the House Financial Services Committee, predicted that Barr’s review will lead to a “massive increase” in capital standards for medium and large institutions that would curb lending and “starve consumers and small businesses of capital.”

In a December speech on the review, Barr said that the “highest standards should apply to the highest risk firms” and that “larger, more complex banks pose the greatest risk and impose greater costs on society when they fail.”

Matching higher capital standards with higher risk “appropriately limits the regulatory burden on smaller, less complex banks whose activities pose less risk to the financial system,” Barr said at the time. “This helps to promote a diverse banking sector that provides consumers greater choice and access to banking services.”

Powell reiterated Wednesday that any new rules would apply to banks with at least $100 billion in assets, with the greatest focus on bigger banks with more than $250 billion in assets. Currently, the Fed subjects banks with $100 to $250 billion in assets to stress tests every other year, while banks with more than $250 billion in assets undergo an annual stress test.

On the prospect of further rate hikes, Powell stuck to the message he delivered last week — that the Fed’s not necessarily done hiking rates. Once it does stop hiking rates, it will probably keep them elevated for some time.

Nearly all members of the Federal Open Market Committee “expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” Powell said in his prepared remarks. “But at last week’s meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the committee to assess additional information and its implications for monetary policy.”

Powell said that curbing inflation “is likely to require a period of below-trend growth and some softening of labor market conditions.”

But the so-called “dot plot” from last week’s meeting, included in the summary of economic projections, shows most committee members expect that the Fed will begin bringing rates back down next year.

Hiking rates to fight inflation

Fed policymakers have approved 10 increases in the federal funds rate since March 2022, bringing the short-term benchmark rate to a target of between 5 percent and 5.25 percent.

The CME FedWatch Tool, which monitors futures markets to measure investor expectations about the Fed’s next moves, puts the odds of another 25-basis point Fed rate hike in July at 72 percent. But by this time next year, futures markets predict that there’s a greater than 90 percent chance that the Fed will have at least started to bring rates down.

Inflation retreating from last year’s peak

In their semi-annual Monetary Policy Report to Congress, Fed staffers noted that at 4.4 percent in April, consumer price inflation was down from a peak of 7 percent from a year ago, but “still well above” the Fed’s 2 percent objective.

The labor market “has remained very tight, with job gains averaging 314,000 per month during the first five months of the year and the unemployment rate remaining near historical lows” and wage gains still “above the pace consistent with 2 percent inflation over the longer term.”

Inflation in housing services “has been high, but the monthly changes have started to ease in recent months, consistent with the slower increases in rents for new tenants that have been observed since the second half of last year,” the report said. “For other core services, price inflation remains elevated and has not shown signs of easing, and prospects for slowing inflation may depend in part on a further easing of tight labor market conditions.”

Fed continues to trim its balance sheet

In addition to raising the federal funds rate, the Federal Reserve has continued to tighten by unwinding the massive purchases of Treasurys and agency mortgage-backed securities (MBS) it made during the pandemic to bring interest rates to historic lows.

By letting about $95 billion in assets roll off its books each month, the Fed has trimmed its holdings of Treasurys and MBS holdings by about $420 billion this year, the report said.

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Email Matt Carter

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