CNN has a story on how the Subprime^* meltdown is Subprime hitting high-end homes.

I think that the story is fairly “cry me a river”, for rich people, but there is an interesting graphic.

The idea here is that Fannie Mae and Freddy Mac cannot fund home loans over $417K, so these so-called “Jumbo” loans carry a larger interest rate.

While Fannie Mae and Freddy Mac are the largest mortgage resellers, it’s not their size, or their ability to negotiate a good deal that gets the lower rate (at least not most of it).

It’s that both of them are GSE (Government Sponsored Entities), chartered by the federal government.

What this means is that while they are private corporations, and owned by shareholders, and both have publicly traded shares, there is the implication, and only the implication, that in the event that they were to become insolvent, then the government would bail them out.

Most of the difference in rates between conforming and jumbo loans is simply this fact, and all of the change relative to one another in the past few months is due to this implicit government guarantee of payment.

This gap has gone from about 0.2% to about 0.7% because people have little confidence in private financial markets, and this appears to be continuing and accellerating.

^*As I’ve said before, it’s not just Subprime