AD&Co in the News

Mickey Storms was quoted in an Inside Mortgage Finance article titled "Bank Demand Helping to Keep Jumbo Interest Rates Relatively Low"

Interest rates on non-agency jumbo mortgages have increased this year, though not in tandem with rates for conventional-conforming mortgages. Bank demand for jumbos is helping to limit interest rate increases on jumbos.

According to Inside Mortgage Finance’s mortgage rate survey, the average interest rate on a 30-year fixed-rate jumbo mortgage increased by 2.14 percentage points between Dec. 3 and July 20, hitting an average of 5.021% as of July 20.

During that time, the average interest rate on a 30-year fixed-rate conventional mortgage increased by 2.48 percentage points, moving to 5.611% as of July 20.

Mickey Storms, managing director of alliances and policies at Andrew Davidson & Co., a provider of risk analytics, said a number of factors influence interest rates on mortgages. And while rates on conventional-conforming mortgages and jumbos often move in lock-step, there are some differences in what drives movements in the rates and those rates can diverge in times of volatility.

In a recent analysis, Storms noted that dynamics in the agency mortgage-backed security market help to establish interest rates in the conventional-conforming market while interest rates on jumbos move more at the whims of demand from banks.

Since the Federal Reserve started its own exercise in interest rate increases, bank demand for jumbos has remained relatively steady while demand for agency MBS has weakened, leading to an outsized increase in interest rates on conventional-conforming mortgages.

“The risk-adjusted returns of the current coupon MBS have increased significantly since the beginning of the year when the jumbo rates gap emerged,” Storms said. “The wider option-adjusted spread levels indicate that MBS investors are demanding higher risk-adjusted returns for holding GSE current coupon MBS recently, putting upward pressure on conforming loan rates.”

He said factors influencing investor demand for agency MBS include prepayment modeling and “liquidity or fear of Fed selling” some of its massive holdings of agency MBS.

Banks, meanwhile, continue to see jumbos as strong investments.

“The vast majority of jumbo prime loans originated are held on bank balance sheets for the purposes of earning long-term income and return-on-equity as held-to-maturity assets,” Storms noted.

He said “banks have a good measure of autonomy with respect to rates,” allowing for less efficient convergence between interest rates for conventional-conforming mortgages and jumbos. “Banks could choose to treat high net worth borrowers with some retention subsidy and be willing to offer lower jumbo mortgage rates to cross sell other products,” Storms said.

That’s the business model employed by First Republic Bank, which has been able to increase its residential mortgage originations this year by focusing on jumbos.

Storms added that investor demand for jumbo MBS has been exceptionally weak in recent months, further pointing to banks as the main factor suppressing interest rate rises for jumbos. “This implies that recent jumbo rates and terms reflect bank balance sheet, return-on-equity type of investing economics,” Storms said.

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