In mid-2007, I began to compile new data on wholesale mortgage interest rates that promised to provide better insights into the market than any existing data source. The rates are those quoted by wholesale lenders, who offer their loan programs through mortgage brokers and mortgage banks. In offering these programs to borrowers, the loan providers add their retail markups, which can vary widely between different programs and different lenders. Wholesale price data thus has less statistical "noise" than retail data.

Recently, I decided it was time to take a hard look at the data to see what they say about the evolution of the financial crisis. The beginning point for the data is May 4, 2007, and the end point is Nov. 7, 2008. The interest rates quoted all assume zero points.

The data show that the price of a mortgage to very low-risk borrowers who need loans no larger than the conforming loan limit of $417,000 was not significantly different at the end of the period than it was at the beginning. (At the beginning of the period, $417,000 was the largest loan eligible for purchase by Fannie Mae and Freddie Mac.) But on riskier transactions and/or loans larger than $417,000, borrowers paid increasingly higher prices over the period. In many cases, lenders stopped quoting prices on high-risk loans altogether.

This pattern is clearly evident in the relationship between interest rates and documentation requirements. These requirements ranged from "full documentation" (lowest risk), to "stated income" (greater risk), to "no income" (even greater risk), to "no documentation" (greatest risk). On May 4, 2007, the spread between full documentation and no documentation was 0.52 percent.

On Nov. 23, 2007, this spread had widened to 0.94 percent. On Nov. 30, 2007, the quote on no documentation was gone, meaning that lenders were no longer offering it. On Dec. 14, 2007, the quote on no income was gone. On May 23, 2008, the quote on stated income was gone. From that date until now, full documentation has been required by the wholesale lenders.

At the beginning of the period, FICO credit scores had little impact on rates if the mortgage was otherwise low-risk. For this reason, I assessed the relationship between FICO and the rate on a fairly risky loan — a cash-out refinance with stated-income documentation. The FICO scores for which I compared rates were 740, 700, 680, 660 and 620.

On May 4, 2007, the rate ranged from a low of 6.15 percent on a 740 to 6.45 percent on a 620, a spread of 0.3 percent. On Sept. 14, 2007, that spread had widened to 1.37 percent. On Sept. 21, 2007, the 620 quote was gone. On Feb 15, 2008, the spread between the 740 and 660 hit 4.04 percent, but the following week the 660 quote was gone. On May 16, 2008, the 680 quote was gone, leaving only the 740. On May 23, 2008, the 740 quote disappeared as well. Wholesale lenders had stopped offering loans with stated-income documentation, no matter how good the credit was. Note that stated-income loans may still be available at some depository institutions that don’t depend on the wholesale market, though they may call them something else.

At the beginning of the period, piggyback second mortgages were widely available as a substitute for mortgage insurance in cases where borrowers made down payments of less than 20 percent. These deals were known as 80/20/0, 80/15/5, 80/10/10 and 80/5/15, where the first number is the percent of the property value provided by the first mortgage, the second number is the percent provided by the second mortgage, and the third number is the percent down payment. The riskiest of these to the second mortgage lender was the 80/20/0, with the risk declining as the borrower’s down payment increased.

The 80/20/0 deals were available until Sept. 28, 2007, 80/15/5s until Dec. 28, 2007, 80/10/10s until Feb. 8, 2008, and 80/5/15s until March 28, 2008. That was the end of the piggybacks. Borrowers who put less than 20 percent down today are back to using mortgage insurance.

Dramatic changes occurred in the relationship between interest rate and loan size. On May 4, 2007, the rate on a $417,000 conforming loan was 5.78 percent while the rate on a $418,000 nonconforming loan was 6.06 percent. The larger loan was not eligible for purchase by Fannie Mae and Freddie Mac. The rate difference of 0.28 percent was not significantly different from those of prior years.

On Nov. 7, 2008, the rate on the conforming $417,000 loan was 5.76 percent, virtually unchanged, but the rate on the nonconforming $418,000 loan was 8.73 percent! Fannie Mae and Freddie Mac, despite their pains and troubles, continue to support the conforming market more or less normally, but the private secondary market for mortgages not eligible for purchase by the agencies has imploded. I will be discussing the implications of this for borrowers next week.

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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