The increase in guarantee fees for conventional loans combined with banks seeking jumbo mortgages for their portfolios has created a situation where interest rates on the two products have inverted. And the situation could continue for some time to come, observers feel.
The Mortgage Bankers Association’s application survey finds the average contract rate on the jumbo at 4.49% but the conforming rate is 4.51%.
Many lenders keep jumbo loans in their portfolio, so the rates on those loans aren’t necessarily set by the bond market, and with fees on conforming loans being raised, that extra cost has translated to higher rates, notes Quicken Loans vice president Bill Banfield.
The g-fee situation has been in play for several months, notes Sue Woodard, president of Vantage Production and a former top producing loan originator. That has made conforming loans more risky.
“The implied risk of loss on conforming loans has risen to about 50 basis points, where on jumbo loans, it is closer to 10 bps,” she says.
With jumbos available at historically low rates, it is unlikely these loans will as quick to refinance as their conforming cousins. For banks which portfolio these loans that is good news.
“Who wouldn’t want to retain a long term relationship with the generally more affluent, well-heeled clients who obtain these loans? Particularly for lenders who offer other financial services via cross-selling efforts, these are extremely valuable clients to attract and retain,” says Woodard.
The agency market will continue “to be beleaguered by people continuing to put their hand in the till,” referring to Congress using g-fees to fund government operations says Ruth Lee, executive vice president-sales, marketing, and business development at Titan Lenders Corp., which operates a correspondent aggregation business.
The banks are looking to put their money to work, adds John Walsh, president of Total Mortgage Services, an independent mortgage banker. These borrowers are able to make their payments and the banks are more confident today than they were just a couple of years ago in properties holding their value.
Plus there is a lot less work involved in originating one $1 million loan versus ten $100,000 loans.
TMS sells its jumbo production to banks and thus it is not worried about being underpriced. It is extremely competitive in pricing compared with other jumbo lenders.
Banks are less concerned about the loan going bad, even though if a jumbo mortgage defaults there is more of a hurt to the institution than if a lower loan amount loan fails.
It is not just national banks buying these loans, but regional banks are also looking to get their money on the street, Walsh says. And if one bank decides things are getting too hot and pulls out, TMS has other sources to sell to.
As a result, TMS in certain situations is able to offer jumbo loans at a lower rate than it can for conforming mortgages, he says.
The rate inversion is likely to continue because of these factors, Walsh adds.
Community banks are sitting on tons of cash and they need to park it somewhere, Titan’s Lee says. Even with the qualified mortgage rule coming up in January, those community banks are a looking to put money into mortgages because the Office of the Comptroller of the Currency is telling them to stay with lower risk investments and in markets they understand.
Mortgages fit that bill because these banks know what is involved in creating and managing a loan whereas something like gold they are less familiar with, she says.
Another issue is that portfolio lenders have latitude with their guidelines and are less prone to rate movements. Lenders who securitize are subject to the pricing whims of the secondary market, Lee says. Sometimes secondary market pricing can change several times a day.
From a consumer standpoint, TMS offers better customer service then the banks, Walsh declares, and thus it can compete against the banks on that level as well.
Initially TMS doesn’t expect jumbo pricing to be impacted by the qualified mortgage rule going into effect on Jan. 10, 2014. “However, as we get more clarity on the potential market for non-QM loans this may change,” he adds.