The current upheavals in the home loan market have prompted me to take a closer look at the structure of the wholesale market than I have ever done before. The wholesale market is where mortgage brokers and smaller lenders, who account for perhaps three quarters of all new loans, get their funding.

Wholesale lenders are mostly large firms who may hold some of the loans they write, but most are sold. They sell to Fannie Mae and Freddie Mac if the loans are no larger than $417,000 and meet the other requirements of the agencies. Loans that don’t meet these requirements are sold to investment banks or others who convert them into securities that are sold to investors.

The non-agency part of the wholesale market currently is claimed to be in a state of disarray. Investors have backed off from purchasing mortgage-backed securities that do not have a direct guarantee of the federal government, or the indirect guarantee of Fannie Mae and Freddie Mac, which is viewed as almost as good. If wholesale lenders have difficulty finding buyers, this will be reflected in the prices and other terms they quote to mortgage brokers and small lenders. And that is what I decided to look at.

My data consists of wholesale price quotes from 12 large wholesale lenders. As a base case, I first defined a “cream-puff loan”; this is a 30-year fixed-rate mortgage for $417,000 on a single-family property being purchased as a permanent residence for $550,000 by a borrower with a FICO score of 720 who fully documents income and assets.

All 12 lenders quoted prices on the cream-puff at various rates. The prices are points plus small fixed-dollar fees, which I combine into one price. At each rate, I have the price quoted by each lender, so I know not only the best price, but also the dispersion of prices by the different lenders. The quotes are as of Aug. 7.

For example, at 6 percent, the lowest price was $4,039 and the highest was $6,589, with other quotes in between. This is a spread of only $2,550, which is exactly what one expects to find in a well-functioning competitive market.

In my second pass, I upped the loan amount to $418,000, leaving all the other features of the loan unchanged. It remains a cream-puff loan in all respects other than size — it is now a jumbo loan ineligible for purchase by the agencies.

At the same price, jumbo rates were 0.625-0.75 percent higher. I do not have a comparable figure for the period just prior to the recent market upheavals, but I have looked at the spread on many occasions over the years, and it was always 0.25-0.375 percent. To my knowledge, the current spread is larger than it has ever been.

The price dispersion was also higher on the jumbos. For example, on a 6.625 percent loan, the best jumbo price was $4,494 but the highest was $11,639, a spread of $7,145. On 7.5 percent loans, the best price was a rebate of $5,059 while the highest was $14,987, a spread of $20,046. Two of the 12 lenders did not provide any price quotes on the jumbo.

With my third pass, I changed the jumbo loan from a purchase loan to a cash-out refinance, and from full documentation to no documentation. Everything else remained the same. This moved the loan into a much riskier niche.

Only four of the 12 lenders quoted prices for this loan, and one of the four was way off the mark. At 8 percent, the best quote was $3,253, next best was $10,623 and the worst $13,218. The best quote by the fourth lender was $14,091 for a 9 percent loan.

This is bad news for all borrowers other than those seeking cream-puff loans for $417,000 or less. In a normal market, borrowers can assume that all loan providers have access to pretty much the same wholesale prices. This means that it is safe to focus on the loan provider’s markup. But when wholesale prices for the same deal vary all over the lot, this strategy no longer works. Borrowers need to consider the range of wholesale sources to which a loan provider has access, and that information is very hard to come by.

Hopefully, the situation will not last long, but meanwhile, what is a borrower to do? Give yourself enough time to consider more loan providers. Shop the four Upfront Mortgage Lenders listed on my Web site, where you can find an online quote, or the absence of one, very quickly.

In the past, I have recommended interviewing Upfront Mortgage Brokers about their markups, in addition to other factors. In today’s market, if the UMB (or any other broker) has a wholesale source for your loan, your interview should include information about his range of wholesale sources in general, and about how many other wholesale price quotes the broker had for your loan in particular.

Just remember that this is sensitive information to brokers. You have a right to ask for it; the broker has a right not to provide it; and you have a right to walk out the door.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at

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