GO
Loading...

Mortgage rates level up for loans big and small

Fuat Kose | E+ | Getty Images

While overall mortgage rates have been rising, a curious thing has been happening within the mortgage market itself. The difference between the cost of a conforming loan ($417,000 and under, except for certain high-cost markets) and a jumbo loan (above $417,000) has shrunk to nearly nothing.

The average rate on the 30-year fixed mortgage last week was 4.56 percent; the average rate on the jumbo was 4.57 percent, according to the Mortgage Bankers Association.

"It's a confluence of events, really, and all of them help the spread between jumbo and conventional loans," said Matthew Graham, COO of Mortgage News Daily.

"Nonagency jumbo lenders began dipping their toes in the water as early as 2011, and even more so into the end of 2012. Strong loan quality due to tight underwriting combined with competition between large banks and securitzers has led to relatively increased demand. Wells and Chase are keen to compete with securitizers like Redwood or Sequoia in order to capture potential income streams from jumbo clients' bank business."

(Read more: Higher mortgage rates may mean easier credit)

In addition, Fannie Mae and Freddie Mac, which back and bundle two-thirds of conventional loans, have been raising the fees they charge to banks, so-called guarantee fees, mostly to protect themselves against default. Guarantee fees have nearly doubled in just the past year.

"As G-fees move higher, this increase gets added into conforming mortgage rates," said Guy Cecala of Inside Mortgage Finance. "It's a factor, but not the biggest one, allowing portfolio jumbo lenders to match or undercut conforming mortgage rates."

The bigger factor, said Cecala, is that 92 percent of jumbo mortgages are made by banks that fund the loans with their deposits and then hold them in a portfolio. Given that the interest paid on consumer deposits in banks is still incredibly low, lenders can still make a profit on mortgages priced at 4 percent or less if they want to. In fact, jumbo loans, by some lenders, can actually cost less than conforming.

The shrinking spread, or increasing cost to banks of doing business with Fannie Mae and Freddie Mac, is slowly opening the door again to private investors in mortgages. That is by design.

(Read more: Private mortgage insurers back in black post-crash)

"The FHFA (Fannie Mae and Freddie Mac's regulator) has been clear that it will continue to raise them [G-fees] in order to decrease the agencies' footprint in the industry—hopefully drawing in private capital," noted Graham.

So far, however, that is only happening for the highest-quality loans, warned David Stevens, CEO of the MBA. The spreads are only close for loans with at least a 20 percent down payment made by borrowers with stellar credit.

"For private-label securities investors, there will definitely be an equal competing bid opportunity to buy mortgages that are within the conforming loan limits but only for borrowers with big down payments," noted Stevens.

More risky loans will still go to Fannie and Freddie. "Clearly the private sector can fill in that space and take these mortgages and likely will. You've already seen it with some of the large banks."

While the pricing may benefit investors now, it is not like they are all rushing back in. For one thing, investors don't get the revenue from mortgage servicing that banks do, because they just buy the MBS. Overseas investors are now only buying AAA-rated securities, and in the United States there is still tremendous distrust of the ratings agencies.

(Read more: Mortgage delinquencies take a sharp turn up)

"When the bottom fell out of the private-label securities markets in the third quarter of 2007, you had an absolute aversion to buying anything MBS-related that didn't come guaranteed. Now this will require a much higher level of confidence," said Stevens.

There are also new risk-retention rules in place for banks that securitize loans, some of which have not been finalized. That market uncertainty continues to hold investors back, but the door is definitely inching open.

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

Questions? Comments? facebook.com/DianaOlickCNBC

  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

Real Estate Explained