History Lesson On Why Rich Borrowers Get Lower Rates

Check out these rates from 10 years ago today. Conforming and jumbo rates were about 2% and 2.5% higher than today, respectively. The market hadn’t fully admitted how bad things were, but it all unraveled in the days and weeks that followed.

Most interesting is the jumbo/conforming spread then vs. now. Jumbo rates shot up when the crisis hit the mortgage market Fall 2007 and stayed high until the crisis matured. But by 2013 jumbo rates counterintuitively became lower than conforming rates on lower loan amounts.

Why? Because conforming loans are backed by Fannie & Freddie and during this period, the guarantee fees (or g-fees) lenders pay Fannie & Freddie to insure the loan against default rose. G-fees are a small percentage of the conforming loan amount and that cost gets passed onto consumers in the form of a higher rate. All lenders sell these lower-balance conforming loans to Fannie and Freddie so it drove up consumer rates as a whole.

Meanwhile as the crisis matured almost no investors were buying jumbo loans from lenders, so banks with big balance sheets started dominating jumbo lending by just keeping them on balance sheet instead of selling them. They can do this because their liabilities (interest paid out on deposits) has been so much lower than their assets (interest collected on loans) thanks to extremely low Fed rates for 10 years.

This means that since 2013, wealthy mortgage borrowers in high priced markets pay less interest than everyday borrowers in the rest of the country. An unintended consequence of crisis recovery measures. But 10 years ago today, higher balance loans cost more, as you can see below. The world has changed it seems. Also see links below for more jumbo/conforming spread comments.

MORTGAGE RATES SEPTEMBER 3, 2008

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.5% (6.59% APR)
15 Year: 6.0% (6.11% APR)
5/1 ARM: 6.25% (6.21% APR)

Super-Conforming ($417,001 to $729,750 by county) – NO POINTS
30 Year: 6.625% (6.71%)

Jumbo ($729,751 – $1,500,000) – NO POINTS
30 Year: 7.0% (7.025% APR)
7/1 ARM: 6.25% (6.21% APR)
5/1 ARM: 6.0 % (6.12% APR)
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Reference:

Why wealthy borrowers get lower rates than everyone else (TheBasisPoint)

The latest in 2018 on costs of jumbo loans (MortgageNewsDaily)

WeeklyBasis 9/3/08: a rate update on this day in 2008 (TheBasisPoint)