These are my settings, they are not too different from your demo code I think:
<diagram1:DfmDiagram IsRotationEnabled="False" IsResizingEnabled="False" AllowDrop="True" SelectionMode="Extended" GraphSource="{Binding FactSchema}" telerik:DiagramAnimations.IsZoomAnimationEnabled="False">
Here you can find a performance profiling session of my application. Looking at the RadDiagram.OnMouseMove method call (see also the attached screenshot, Hit Count 114) I've found that it internally calls BackgroundGridBase.PrepareLine thousand times (Hit Count 7592).
Am I missing something else?