As the virus took hold, banks were staying clear of jumbo loans. But we’re seeing some positive activity now.
Jumbo loans, a favorite tool of lenders to finance high-end homes for wealthy buyers, sunk like a stone as coronavirus began impacting the economy starting in March. But there are signs that jumbo loans are beginning to rebound.
Lenders shied away from those loans as a disproportionate number have entered forbearance agreements — 11.8 percent, compared to just 8.7 percent for all mortgages, the Wall Street Journal reported. Jumbos, which are not eligible for federal guarantees, exceed the limits set by the Federal Housing Finance Agency, and are typically used to finance more expensive home purchases.
Since 2015, the rates for such mortgages have been lower than conventional mortgages due to the belief that they are a lower risk due to the buyer profile, according to the Mortgage Bankers Association. But as the coronavirus turned the world upside down, the dynamic between jumbo loans and conventional mortgages also reversed. Since February, Jumbo loan rates have averaged 210 basis points higher than rates for conventional mortgages. And prospective borrowers with ample savings and sterling credit were turned down by their banks.
Lenders including Wells Fargo stopped buying jumbo loans entirely from other originators, and other banks, including Wells Fargo, Bank of America, Chase, and TIAA Bank toughened their lending standards.
As the stay-at-home orders ease and the market restarts, the gap between jumbo loans and conventional mortgages has narrowed. In June, conventional mortgage rates averaged 3.3 percent, while jumbos are still a bit higher, at 3.5 percent.
Still, the signs of a rebound are there. Guaranteed Rate, a large nonbank lender, said it wrote twice as many jumbo loans between May and June as it did between April and May, according to the Journal. And a few large bank lenders said they expect to loosen lending standards as the economy rebounds, though it’s unclear when that will be.