Lending has tightened and jumbo loans might be scarce
It’s never ideal to operate from a position of fear, but lenders appear to be doing just that given the litany of market challenges that have befallen the mortgage industry of late.
Melissa Cohn, regional vice president at William Raveis Mortgage, spoke to Mortgage Professional America to discuss the reflexive moves on the part of lenders amid inflation.
“As rates have gone up along with fears of a recession, and especially so over the course of the last few weeks because of the debt ceiling crisis, banks have increased their risk-based pricing,” she told MPA during a telephone interview. “This means that the average margin of a 30-year fixed rate is somewhere between 1.75% and 2% over 10-year Treasury, and that margin has widened to well over 3%.”
Fears are not tied to data
By and large, such pricing increases aren’t tied to data but based solely on fear manifesting itself as aversion to risk, she suggested. “It’s not data-dependent, not anything dependent,” she said. “The banks have simply raised rates because they fear there is greater risk in lending and as long as the risk is perceived, it means mortgage rates are higher than they would be naturally based on where we are in terms of economic data.”
How that heightened aversion toward risk has manifested itself is not anecdotal but something Cohn has witnessed herself, she said.
“I have seen several lenders increase their rates,” she said. “They’re happy to keep them there figuring that if someone needs to come to them, they’ll come to them. If not, they’re happy not to make the loan. I have one bank now that has a seven-year fixed at 7%. That’s ridiculous.”
Jumbo loans may become less accessible to borrowers
This fear likely will lessen the accessibility of jumbo loans, she added: “Conforming loans can be sold to Fannie and Freddie, so there is a government entity that provides a place to sell those loans,” she said. “Jumbo loans do not have a Fannie or Freddie so they are either held as portfolio loans by lender or they’re sold to much more of a smaller secondary market, which is not as efficient as Fannie and Freddie.”
Given the risk-averse backdrop, Cohn also expressed skepticism toward any lender rolling out jumbo products to entice customers. “Sometimes it’s a lot of putting lipstick on a pig,” she said. “There’s absolutely no way a wholesale [lender] can come out with a new type of jumbo loan. Maybe they found a source to provide them with financing, a new lender or investor, but there’s no new product out there.”
She told of a client’s experience in trying to buy property in Florida.
“I have another client who banked at Key Bank,” Cohn said. “She was buying a house in Florida, looking at a jumbo loan. Key Bank basically said they’re really only interested in doing conforming loans, so their 30-year fixed rate was in the mid-7s when I offered her a rate in the mid-6s.”
And let’s not even get into that bonds influx
Cohn also worries about the impact on liquidity, prompted by an expected influx of new bonds as the US Treasury refills its coffers now that the national debt ceiling standoff is over. In its report on the matter, Bloomberg calls the expected inundation of bonds into the Fed’s reserves a “tsunami.”
The fear is this, too, could make borrowing more expensive. “Borrowing gets more expensive,” Cohn said. Cohn said she agreed with Bloomberg’s assessment that the bonds influx will be another drain on dwindling liquidity “as bank deposits are raided to pay for it,” she said.
The US averted what would have been the first default of its debts when a deal was reached on June 2 between President Joe Biden and House Speaker Kevin McCarthy. The compromise calls for limits on federal sending for two years and a suspension of the debt ceiling through the 2024 election.
Want to make your inbox flourish with mortgage-focused news content? Get exclusive interviews, breaking news, industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
