The larger the mortgage, the riskier the loan.

The riskier the loan, the tougher it is for a home buyer to get a mortgage approved.

That is a basic lending rule of thumb and it appears even federal government intervention can do little to quickly change that fact.

Months after the Economic Stimulus Act of 2008 temporarily raised the maximum amount on a conventional conforming loan from $417,000 to about $730,000, risk averse lenders have not been convinced to substantially lower interest rates on the larger loans.

The conforming loan adjustment was supposed to generate more affordable interest rates on the larger, so-called "jumbo conforming" loans. The hope was that the larger jumbo conforming loans would have nearly the same interest rates as the old conventional conforming loans.

Then, as the theory went, the lower rate on the larger loans would have encouraged more consumers to buy homes, or enable them to refinance to lower interest rate loans, especially in high-cost regions like California.

That has not happened. Yet.

Instead, in Silicon Valley, for example, the market has generated a new tier of jumbo conforming loan interest rates nearly a full percentage point higher than old conventional conforming loan rates.

But that's because the new jumbo conforming loans are still larger loans and even with federal backing, in today's credit crunched economy, the larger loans pose a risk too great for lower interest rates.

Federal government-sponsored Fannie Mae and Freddie Mac buy conforming loans and repackage them for sale in the secondary market of mutual funds, pension funds and investments around the globe.

But skittish investors demand higher yields (hence higher rates for the larger loans, compared to the smaller loans) because mortgage investments involving smaller loans (largely due to their toxic nature) have already ripped into their returns.

There is fear in the market.

The untested assembly-line production and mass-marketing of subprime and nontraditional mortgages was a disaster for both investors and homeowners. Right now investors simply aren't feeling so lucky about another untested brand of mortgage involving still larger loans.

In addition to higher interest rates than hoped for, the jumbo conforming loans also contain tougher underwriting requirements that demand higher credit scores and stiffer qualifications than conventional conforming loans.

Connie De Groot, a broker associate in Coldwell Banker's top Beverly Hills office, says jumbo conventional loans with lower rates are inevitable, just not over night.

"I don't understand why everyone is expecting things to change overnight. It took years to get to this point," she said.

De Groot says there's also limited demand from the public for a loan product with an unknown track record. The market simply needs time to embrace the new loans.

How much time?

Six months to a year, says De Groot.

"I'm very convinced and hopeful that with time people will understand the new options and take advantage of them and rates will go down," she added.

Published: April 7, 2008

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Broderick Perkins parlayed a 30-year career in old-school journalism into a digital-age news service offering editorial content and related consulting services. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based content provider specializing in residential real estate, consumer news and consulting. An open house for news that really hits home, the DeadlineNews Group includes the umbrella website DeadlineNews.com the flagship blog Deadline Newsroom, and three Examiner.com outposts -- Real Estate News Examiner; Consumer News Examiner; and Offbeat News Examiner. Along with a decade of work here with Realty Times, Perkins also provides content for Silicon Valley based ERate.com and the new AOLNews.com, where now "You've got news....that really hits home." His current work can also be found in Californian publications, the San Jose Mercury News, San Francisco's The Registry and the Salinas Californian. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News, before launching DeadlineNews Group. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Nolo.com among more than four dozen publications. In addition to managing the DeadlineNews Group, Perkins served as chief editorial consultant for "Nolo's Essential Guide To Buying Your First Home."