Fannie and Freddie face price competition from mortgage investors

Jumbo mortgage lenders are now financing smaller loans, but without Fannie Mae’s fees.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | May 15, 2021

Investors have truckloads of cash desperately looking to find the safest and highest yields. Afterall, the Overnight Bank Funding Rate, or the cost of funds, is near zero, according to the New York Fed.

For decades, secondary mortgage market pricing experts have told me they could never figure out how to find pricing more competitive than Fannie Mae and Freddie Mac.

No more.

There is a play here for mortgage investors to attract profitable loan volume by being competitive with F & F pricing. And in the process, they’re throwing out many of their dinosaur underwriting rules that stop plenty of borrowers from getting their mortgages approved.

Investors are even going below the traditional jumbo market and financing loans below the “conforming” limit of $822,375 in Los Angeles and Orange counties and $548,250 in the Inland Empire, competing directly with F & F for those mortgages.

For example, well-qualified borrowers can get a 30-year fixed-rate jumbo for up to $2 million at 2.625%, potentially cheaper than a Fannie mortgage.

They can get loans without mortgage insurance with at least 10.1% down or, in the case of a refinance, equity of 10.1% for loans from $548,251 to $2 million. F & F require mortgage insurance, whether it’s a la carte pricing or baked into the rate.

They can cash-out up to 89.9% of a property’s value, compared with a Fannie loan-to-value limit of 80%, which also includes expensive pricing add-ons.

Non-owner-occupied pricing for a 30-year fixed-rate loan starts as low as 2.75%. F & F are running in the 3% to 3.5% range for a 30-year mortgage.

Loans for these non-owner-occupied and second home mortgages often come without the crazy Fannie Mae fees and restrictions, such as the “loan-level-pricing-adjustments.” These are in addition to other harsh restrictions on these types of loans imposed by the Federal Housing Finance Agency, the regulator overseeing Fannie and Freddie.

Some lenders require just one year of tax returns to qualify for a loan. Traditional jumbo underwriting uses an average of two years of tax returns, which often resulted in loan denials for self-employed borrowers who saw their incomes drop in 2020 due to the pandemic.

Some also are permitting borrowers to cover their entire down payment and closing costs with funds received as a gift, without having to show where those funds came from. Fannie requires you show where those gift funds came from, and the borrowers’ relationship to the person providing the money – such as a family member.

When you are out on your mortgage search, stop limiting yourself to Fannie and Freddie’s non-jumbo financing, even if it’s a small mortgage.

We’re talking about a much wider mortgage menu than ever imagined.

Freddie Mac rate news: The 30-year fixed-rate averaged 2.94%, 2 basis points lower than last week. The 15-year fixed-rate averaged 2.26%, 4 basis points lower than last week.

The Mortgage Bankers Association reported a 2.1% increase in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $101 more than this week’s payment of $2,294.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 2.25%, a 15-year conventional at 2%, a 30-year conventional at 2.75%, a 15-year conventional high-balance ($548,251 to $822,375) at 2.25%, a 30-year conventional high-balance at 2.875% and a 30-year fixed jumbo at 2.625%.

Eye catcher loan of the week: A 30-year fixed jumbo at 2.375% with 2 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.