While the housing market as a whole is still on somewhat shaky ground, at least one sector is enjoying a new rush of recovery: Jumbo mortgages.
In April, the National Association of Realtors (NAR) reported that sales of homes priced between $750,000 and $1 million enjoyed a 41 percent year-over-year increase. Things are also sunnier on the securitization side: The trade journal Inside Mortgage Finance reported that lenders sold $4 billion in jumbo loans during the first quarter of this year–more than $3.5 billion total sold during all of 2012.
David Abrahamson, senior vice president at Atlanta-based Equity Loans, believes that jumbo mortgages offer the best of all worlds.
“It is a better performing product,” he explained. “With jumbos, you are not looking at a maximum financing situation. You are dealing with a very stable borrower who can make a large down payment and who carries a high credit score. This is a very safe product, and pretty much everyone wants to be a player now.”
“Jumbos have a zero default rate,” said David Zugheri, co-founder of Houston-based Envoy Mortgage, who pointed to the success of Redwood Trust in its jumbo-packed residential mortgage-backed securities. “Ask Redwood about delinquencies. Out of umpteen thousand loans, they had one person who was 30 days late.”
Admittedly, the jumbo mortgage market is still something of a niche–the NAR data found that only four percent of residential properties valued at $500,000 or higher were purchased in 2012 by first-time homebuyers. Still, the jumbo market is a lucrative niche, and one that seems to be more lucrative with each passing month. In July, Bankrate.com found that the national rate on jumbo mortgages was only 30 basis points above the 30-year national average for all mortgages–a 170 basis points drop from December 2008.
“The volatility of the market impacts all loans, but it impacts jumbo loans less,” said Mat Ishbia, president and CEO of Troy, Mich.-based United Shore Financial Services. “The interest rate moving a half-point or one point will not stop people from buying.”
The new focus being put on jumbo mortgages is no surprise to Ishbia–his company’s lending subsidiary, United Wholesale Mortgage, was ready for this back in December 2011, when it debuted “The Big & Easy” jumbo mortgage, a product that could accommodate loan amounts up to $2.5 million and loan-to-value ratios up to 80 percent.
“It is a great product for our client base,” Ishbia said. “This has been a Fannie-Freddie-Ginnie market for the past couple of years. But now that the private market is coming back, we will see a lot more of this trend.”
Another lender, John Walsh, president of Milford, Conn.-based Total Mortgage Services, agrees with Ishbia’s diagnosis.
“We had a recent uptick in wholesale jumbo products,” Walsh said. “On the wholesale side, brokers have more shortages of available products.”
Walsh believes that the industry will begin to see more lenders offering jumbo mortgages.
“There are lenders that are looking to expand their product offering,” he said. “We will be seeing more competitive priced jumbo mortgages.”
Bob Rubin, managing director of The Business Loan Connection LLC, based in Southfield, Mich., points to a surprise player in the growth of the jumbo mortgage market.
“The hidden guy is the credit union industry,” Rubin said. “Some credit unions are offering interest takes on this mortgage–they are doing 90 percenters and 85 percenters, offering an 80-10-10. And some credit unions here in Michigan will do about 100 percent financing if people have great cash resources.”
Rubin believes that credit unions are the perfect institutions for offering jumbo mortgages.
“Credit unions are non-profits, and they exist for the benefit of their members,” he explained. “Their pricing and customer service is usually a lot better than an ordinary thrift. And with a jumbo mortgage, they have more of an individualized loan scenario versus the rigid requirements that impact everyone.”
Clouds on the horizon?
However, the jumbo mortgage market is not without its share of current and potential problems. Scott Stucky, chief operating officer at Idaho Falls, Idaho-based DocuTech, warns that the still-evolving qualified mortgage (QM) issue can cloud the product’s future viability.
“QM is the 800-pound gorilla in the room,” Stucky said. “Jumbos can be outside of the requirements of QM, and that puts an additional layer of liability and financial responsibility on the originator, who needs to retain five percent ownership interest in the loan. Many small institutions will have problems retaining that, and it also disqualifies some big mortgage banks. The big question will be how get around that and make it work. Otherwise, it creates a top heavy market where only larger banks operate.”
“The aggregator space is decimated,” said Michael Kime, chief operating officer at W.J. Bradley Mortgage Capital in Centennial, Colo. “Those left are mainly big banks.”
Kime adds that any expansion of jumbo origination will create a lopsided environment in regard to potential securitization channels.
“The market is a bit disjointed today,” he said. “We do not have the right equilibrium.”
Howard Hoyt, president of Fort Wayne, Ind.-based USA Wholesale Lending, questions whether non-depositories will be able to vigorously compete in this market.
“Liquidity is an issue for the true non-conforming product,” he said. “There is more and more demand for the product, and it will be interesting to watch the demand escalate based on increased sales. But there will also be the price point differential between depositories and non-depositories. On the aggregator side, Redwood and Penny Mac are coming out with product, but I don’t know how many guys have the wherewithal to compete with the depositories, unless they set up as a real estate investment trust.”
Still, some industry experts that believe these problems can be overcome, in one way or another.
“The big question is how this whole QM thing plays out,” said Abrahamson. “But there are non-QM players out there willing to take that risk. And this product is great for lenders that want to maintain their well-heeled clients.”
“The biggest problem is that a lot of banks do not understand the beauty of this product and what they could create with it,” said Rubin. “It gives the customer the availability to rely on their good credit and cash resources.”
Phil Hall is senior editor of National Mortgage Professional Magazine. He may be reached by e-mail at [email protected]