Housing market: What are jumbo loans?

High mortgage rates continue to be a problem for the housing market, especially for those with pricier homes that require a jumbo loan. But what is a jumbo loan? Yahoo Finance's Dani Romero explains.

Video Transcript

RACHELLE AKUFFO: Lenders are losing their appetite for originating mortgages on pricier homes. Let's bring in Yahoo Finance's Dani Romero to give us a temperature check on the mortgage market. So Dani, for our viewers, explain what a jumbo loan is and how this all ties in.

DANI ROMERO: So a jumbo loan is a loan that is too large to be backed by the government. It also varies depending on the state. But the story here is that the tables have turned given the recent banking fiasco. With interest rate volatility, banks are shying away. Investors are dealing with risks as these loans are less likely going to be paid off any time soon.

The other side of the coin, though, for borrowers-- there are fewer options. So this could be a positive for borrowers. They can negotiate better terms. But again, if we take a look at the 30-year fixed rate with jumbo loan balances of above $726,000, rates sit around 6.78% for the last week of May. And if we compare that to the conforming loan for the 30-year fixed rate, it's around 6.9%.

So that spread is a little bit narrower now. And so this leads to some experts really concerned about liquidity. Some lenders are also artificially pricing these loans to be worse so that they kill the appetite and not a lot-- you know, there's not a lot of demand for it as well. Weaken that demand there. But again, jumbo loans generally sit on the bank's balance sheet since they're not backed by the government, and they also have higher fees. So the end result, the conclusion here, Rachelle, is that it's going to be a tough market for both the lender and the borrower.

RACHELLE AKUFFO: It's going to be a tough time indeed as people try and navigate this space. Thank you for breaking that down for us, our very own Dani Romero.