Why Jumbo Mortgage Rates Make No Sense Right Now

The pandemic has affected jumbo loans in an odd way: rates charged by the nation’s mortgage lenders, which usually fall within a 10th of a percentage point of each other, are all over the place.

Mike Fratantoni, chief economist for the Mortgage Bankers Association, said he noticed the wide jumbo-loan rate variance starting in March.

“I’ve seen a quarter- to a half-percentage-point range for exactly the same borrower,” Mr. Fratantoni said. Pre-Covid, the spread between offers made by a pool of lenders to the same qualified borrower would rarely rise above 10 basis points, or 0.1%, he said.

Some mortgage brokers see even wider variance. Anthony Bird, owner of Riverbank Finance, a mortgage broker in Grand Rapids, Mich., said in mid-August he was searching for a 30-year fixed for a client buying a $900,000 house and putting 25% down. One lender offered the highly qualified borrower a 3.25% rate, another a 5% rate. Neither loan required paying points, Mr. Bird said.

It is happening because important components of the jumbo marketplace—the correspondent and securitization channels—have gone nearly dormant during this crisis. The correspondent channel refers to banks, such as major player Wells Fargo, that used to purchase many jumbo loans originated by other lenders to hold them in their portfolios.

Securitization refers to investors who buy up bundles of jumbo loans from the originating lenders; these private investors are required in this marketplace because government-sponsored entities such as Fannie Mae and Freddie Mac don’t buy jumbo loans. Both of these avenues to selling off a jumbo loan have dwindled in the Covid era, leaving most jumbo-loan originators owning the loans they approve and initially fund.

As a result, there is a much smaller pool of lenders willing to offer jumbo loans. Craig Turley, owner of AZ Mortgage Broker in Phoenix, said his stable of jumbo-loan wholesalers has shrunk to one-third the size it was in February. Mr. Bird said his roster of jumbo lenders is down by 80%. The MBA’s Mortgage Credit Availability Index, a formula designed to gauge access to a variety of mortgage products, shows consumer access to jumbo loans was 60% lower in July than it was the year prior. The frozen landscape is thawing, but there are fewer jumbo lenders and options than there were pre-Covid.

Because banks now hold on to these jumbo loans indefinitely, they are setting their rates and qualifying standards as their individual balance sheets dictate, Mr. Fratantoni said. While a competitor might offer better rates, a bank may decide it doesn’t make financial sense to match them.

Mortgage brokers say it is hard for them to compete with the low jumbo rates offered today by the big banks, who typically eschew brokers and instead use their own in-house sales teams to reach consumers. The brokers’ current clientele largely consists of people who don’t meet the large banks’ strict qualifying standards or don’t have the high account balances banks want in exchange for the best rates.

Sean Bloch, owner of Block Financial Resources, a mortgage broker in New York, said he recently sought a loan for a client who needed $900,000 to $1 million to buy a house in Westchester County. The client had a credit score just below 700, he said, so larger banks offered rates in the high 4% range. A community bank offered 3% on a 30-year-fixed.

Several national banks, including Bank of America, Wells Fargo and Citibank, offer special incentive rates for “relationship” clients who hold assets with them or bring new assets to them. Mr. Turley had a customer in Scottsdale looking for a $1 million loan to purchase a $1.3 million house. Some big banks were offering 30-year fixed rates as low as 2.875%, but only for borrowers with FICO scores above 740, 30% to put down, and at least $250,000 in their banks, Mr. Turley said. His customers didn’t qualify. Instead, he found a rate of 3.5%—plus a half a point up front—with a mortgage wholesaler.

“The spreads right now are about half a percent higher between the big banks and the wholesale side, but with the big banks you have to check all the boxes,” Mr. Turley said.

A To-Do List for Today’s Jumbo-Loan Seeker…

1. If you save and invest with one major bank, call them first. Call your credit union as well as the other large banks and see what they offer, too. They may ask you to move assets to their bank in exchange for the best rate.

2. Find a mortgage broker who can explore a range of lending products from wholesalers, regional banks and credit unions. Findamortgagebroker.com, a national database owned by United Wholesale Mortgage, a seller of loans through broker channels, lists 10,000 licensed, independent brokers.

3. If your broker doesn’t have regional and community banks in their stable, reach out to these players yourself or call a few more brokers to find one who does. Brokers say some of their best jumbo loans are coming from local banks.

4. Take a good offer back to the national banks and see if they will beat it. “They match our rate in a heartbeat or offer a lower rate if the client moves $1 million to $5 million to their bank,” said Pranav Sahai, chief executive of Jumbo Loan Experts, a mortgage broker in New York.