Jumbo mortgages — gigantic loans which historically have been much-more expensive than FHA, VA and conventional financing — are selling at a discount. In fact, at the start of December elephantine loans were cheaper than conventional mortgages.
Jumbo borrowers are no longer paying a premium for their huge loans and you have to wonder, how is this possible? Are jumbo loans suddenly less risky?
The answer is no. In fact, RealtyTrac reports that while foreclosures were generally down 23 percent through October, foreclosure levels were up 61 percent for homes in the $5 million range.
If penthouse and estate owners are facing such hardships, why is it that jumbo loans are priced as if they were almost risk-free?
The answer is not that jumbo loans have become cheaper, it’s that conventional mortgages have become artificially more expensive.
What’s happened is that the mechanics of the mortgage business have changed. When you see lower jumbo rates what you’re really seeing is an effort to prevent marketplace competition, to shift the mortgage business from Fannie Mae and Freddie Mac to Wall Street. None of this is a surprise or a secret. As the White House explained in August:
“The current housing finance system, where the government guarantees more than 80 percent of all mortgages through Fannie Mae and Freddie Mac and FHA, is unsustainable. A reformed system must have a limited government role, encourage a return of private capital, and put the risk and rewards associated with mortgage lending in the hands of private actors, not the taxpayers.”
“The powers that be don’t want Fannie and Freddie to exist anymore, and they see increasing the g-fees as a means to that end,” wrote David Dayen on NakedCapitalism.com last September.
Winding Down Fannie Mae and Freddie Mac
Conventional, FHA and VA mortgages are bought from lenders by Fannie Mae and Freddie Mac. The huge secondary lenders were nationalized by the federal government in 2008 and under government control they have increased the guarantee fee or the g-fee — the charge to guarantee loans sold to investors — to new heights.
According to Salomon Smith Barney, the guarantee fee has typically been small, just 19 basis points in 2001 (a “basis point” is equal to one hundredth of one percent). Under government control, however, the g-fee has been seen as a revenue generator and as a way to make Fannie Mae and Freddie Mac less competitive.
Under the Temporary Payroll Tax Cut Continuation Act of 2011 the g-fee was increased by 10 basis points. The money collected was not used to boost homeownership or reduce foreclosures. Instead, Congress directed that the money was to be deposited with the Treasury. In other words, the fee increase was nothing but a tax increase by another name.
In December 2012 the g-fee was again raised by 10 basis points.
In December 2013 the guarantee fee increased by an additional 10 basis points. At the same time an “adverse market fee” is being eliminated except for the states of New York, Florida, New Jersey and Connecticut.
It’s not possible to believe that the increase in guarantee fees has been needed to protect the stability of Fannie Mae and Freddie Mac. Fannie Mae had an $8.7 billion profit in the third quarter while Freddie Mac took in $6.5 billion.
Notice that the g-fees are now about 50 basis points. That means the cost to borrow with conventional, FHA and VA financing has increased by .5 percent.
However — and this is the canary-in-the-coal-mine that gives away what’s really happening — the increase in guarantee fees does not apply to jumbo mortgages. That’s because Fannie Mae and Freddie Mac only purchase mortgages which are equal to or less than the mortgage loan limits. Jumbo loans — by definition — have initial principal amounts which are above the established loan limits.
In addition, notice that with the “adverse market fee” FHFA does not charge the same costs everywhere. The fees are substantially higher in New York, Florida, New Jersey and Connecticut. This is a sharp departure from the central purpose of Fannie Mae and Freddie Mac, the effort to assure that mortgage money is equally available nationwide. The segregated FHFA fees are possible because they are not paid directly by borrowers and so are effectively hidden from public view.
Who Pays — And Who Benefits
In the end, what’s really happened is that the cost of conventional financing has risen in an effort to make Fannie Mae and Freddie Mac less competitive to “put the risk and rewards associated with mortgage lending in the hands of private actors.” This has been done by government action; the free market idea of having private players offer better products and lower prices to gain profits and market share has been ignored.
The catch is that the effort to close down Fannie Mae and Freddie Mac is not without cost. Millions of borrowers are paying more than they should for real estate financing. Marginal borrowers may not even qualify for a mortgage because of rising FHFA fees. How artificially-higher costs help borrowers and the housing market is unclear. How making Fannie Mae and Freddie Mac less competitive helps the big banks on Wall Street is obvious.