Orion’s brokers tell us that your clients often ask why are jumbo rates, often approaching $1 million or more, higher than conforming conventional rates? After all, isn’t there more risk? Isn’t the securitization market, in this case the “private label” securitization market, much flightier than that for Freddie Mac, Fannie Mae, FHA and VA loans?

The most recent application data (late August) from the Mortgage Bankers Association notes that, “The 30-year fixed mortgage rate increased for the second week in a row to 5.80 percent, reaching its highest level since mid-July… Mortgage rates have been volatile over the past month, bouncing between 5.4 percent and 5.8 percent… In another sign that market volatility has picked up, the average rateon a jumbo loan was 5.32 percent, 48 basis points lower than for a conforming loan. This spread reached a high of over 50 basis points in July, and had narrowed, before now widening again.”

Orion’s brokers tell your clients that loan level price adjustments (LLPAs) and g-fee costs are a large part of the cost to the borrower. Any changes, or potential changes, to those items can be just as important to movements in overall interest rates. The FHFA oversees Fannie and Freddie, and therefore the guarantee fees (g-fees) charged by Fannie Mae and Freddie Mac. Those costs are the same for every lender.

Conventional conforming LLPAs currently can be up to 3.25% up front, which can equate to a 50-75 basis point increase in the mortgage rate (on top of private mortgage insurance). And g-fees are north of 50 basis points, which at an 8:1 buy down ratio can result ina 4-point hit to borrowers. Jumbo loans do not carry g-fees.

Of course everyone wants to pay less in fees, and Orion strives for this with our clients. But before everyone sends in a request to the FHFA to “lower borrower’s fees now!”, it is important to remember that the FHFA is juggling several components in setting these fees. The first is the appropriate return on capital that should be driving g-fees. The second is whether or not there is a level of g-fees that will drive private capital back into the market. The third issue is the impact of rising g-fees on overall mortgage volume. And the fourth issue is whether the GSEs should charge higher LLPAs if it means that these loans move to Federal Housing Administration (FHA) programs?

Unfortunately for borrowers, whether they use a broker or not, the fee increases over the years have hurt them directly, and regardless of what the bond market does, or base mortgage rates do, the fact remains that the cost of doing business with Fannie, Freddie, and the FHA has gone up. And jumbo investors, and therefore lenders, much less so. And thus the difference.

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