Loan activity went into a deep freeze following the onset of the pandemic, but lenders seem to be loosening their purse strings again…a bit.
Jumbo Market Shows Signs of Heating Up!
Billy Rose, the founder of real-estate brokerage the Agency in Beverly Hills, got an offer on a $5 million house in the Sunset Strip neighborhood in April. Mr. Rose knew the buyer and his finances pretty well, because the buyer had made a lower offer on the property back in January, backed up with an 80% jumbo mortgage prequalification. On a hunch, Mr. Rose told his buyer to check with the lender to see if that type of jumbo loan was still available.
It wasn’t. This time around, Mr. Rose’s buyer, who was self-employed, would need to put 30% down. The deal never came together, he said.
Mortgages markets overall have taken a beating in the Covid-19 crisis. But jumbo loans have been thrown to the mat. In early April, Wells Fargo stopped buying jumbo loans from other loan originators. Many banks followed suit, which froze the liquidity in a large part of the jumbo market. Most lenders, including Wells Fargo, Bank of America, Chase, and TIAA Bank, tightened lending standards or scrapped certain types of jumbos, such as investment loans or cash-out refinances.
Some nonbank lenders stopped doing any jumbos at all. Borrowers found they needed near-perfect credit scores and 20% or even 35% for down payments. The gap between jumbo and conventionalloan rates has closed since the pandemic’s peak but still remains wide.
According to data provided by the Mortgage Bankers Association, since 2015 average rates on 30-year fixed jumbo loans have been lower than the average rates on 30-year conforming loans. Since February, that has reversed, with average rates for a 30-year jumbo at 3.73%, compared with 3.52% for conforming loans.
Average rates on jumbo loans have been so low for the past several years partly because lenders view jumbos as lower risk. But that is another thing turned upside down by the Covid-19 crisis. As of June 16, 11.8% of jumbo loans were in forbearance, compared with 8.7% of all mortgages, according to Black Knight, a mortgage data and technology firm. With conforming loans in forbearance, government agencies eventually step in to cover monthly payments; with jumbos, the mortgage owner gets nothing while a borrower doesn’t pay.
While it is too soon to call it a full-scale “reopening” of jumbo markets, there are some emerging signs of life. One measure is the gap between average conventional loan and jumbo rates: In April, conforming 30-year mortgage rates averaged 3.4%, while jumbos averaged 3.7%, according to data provided by mortgage technology company Optimal Blue. That gap narrowed in early June, to 3.3% for conforming loans and 3.5% for jumbos. Another measure is the return of jumbo loans for self-employed borrowers served by niche lenders.
John Lynch is chief executive of PCMA, a lender in Irvine, Calif., that specializes in jumbo loans for affluent borrowers whose financial profiles don’t match traditional credit criteria. PCMA’s median loan amount is about $1 million, Mr. Lynch said. Typically, a 30-year jumbo loan from PCMA has a rate 100 to 150 basis points above bank jumbo loans, so if a bank lends at 3.5%, PCMA lends at 4.5% to 5%.
PCMA’s liquidity comes from packaging and securitizing its loans and selling them to investors. In April and May, it found few takers for these securities—and those takers demanded extremely high returns. So the best jumbo rates it could offer were 8% or 9%—which it didn’t even bother to promote, Mr. Lynch said. But now, in mid-June, liquidity has returned to the market and “we have our first set of loan docs going out today at 4.99% for a 30-year fixed,” he said.
Guaranteed Rate, a large retail nonbank jumbo lender, wrote twice as many jumbo loans between May and June as it did between April and May, said Kasey Marty, executive vice president.
Several of the large bank lenders say that stricter lending standards will be loosened as the economic picture improves, but that it is too soon to say when.
If you need a jumbo loan now, here’s some advice for how to navigate the landscape…
Don’t stop after an online search. Some online, nonbank lenders, such as Better.com and online mortgage brokers, such as Morty.com, offer jumbos that are later purchased by banks. Much of that market is frozen, so some types of loans have disappeared. Call mortgage brokers and banks to find the programs that are still alive and well.
Get ready to provide proof of employment and income multiple times throughout the transaction, as lenders now need continual assurance that a paycheck will continue flowing right up to the week the loan closes. Prepare employers or bosses for multiple requests for letters and make sure you have easy access to pay stubs—ideally in a PDF that you can upload.
If you are self-employed, focus on “having a story together,” said Micah Jindal, who leads the mortgage practice for Boston Consulting Group. If your income is volatile—with an annual bonus or profit-sharing—be ready to explain how it works. Create a profile of your total assets. If banks turn you down, seek out a lender who specializes in self-employed jumbo borrowers.
Ask banks what programs they have for loyal customers or borrowers with lots of assets. Ocean First Bank, a regional bank than lends in New Jersey, New York and Philadelphia, may reduce a down-payment requirement to 20% from 25% for an existing customer with assets at the bank in some cases, said Christopher Maher, president and CEO.
Citibank has a “High Net Worth” program for people with $500,000 or more in liquid assets, even if they aren’t held at Citi (they do need to have a least $50,000 at Citibank); such customers may be eligible for interest-only loans, higher loan limits or other terms not available to other borrowers, said Brad Wayman, head of U.S. mortgage sales at Citibank. “Relationship pricing” offers should always be scrutinized carefully, but in this period can be a rare way to find wiggle room in the lending standards.