It’s a good time to buy an expensive home.
Jumbo mortgage loans, which sizzled during the housing market’s run-up and then fizzled spectacularly, are back with more flexible products from more lenders and interest rates that are inching ever closer to the terms offered to buyers of much less luxurious homes.
As a result, more consumers are able to consider the purchase of luxury homes, a market that has been long stalled. Nationally, the annual dollar volume of jumbo loans is on pace to be the best since 2007, and a growing field of lenders is seeking to build a customer base or cement established relationships by offering those mortgages.
During the housing industry’s darkest days, when private-investor interest in mortgages was nil, the overwhelming majority of mortgages written were either Federal Housing Administration-backed loans or mortgages that met Fannie Mae or Freddie Mac standards and were then sold to either agency. The loan limit for those loans in most parts of the country is $417,000.
Even during the downturn, lenders continued to make some jumbo loans to their very best clients – those with stellar financial pedigrees that included high credit scores, high cash reserves and sizable down payments, sometimes of more than 30 percent of the purchase price. The loans were held on the lender’s own books.
What’s different today is that demand for big loans is on the rise, and lenders are eagerly stepping in at a time of recovering home prices and improved economic reports. Jumbo-loan volume still pales in comparison with the market’s headier days, but there are also successful efforts to bundle and sell jumbo-mortgage securities to private investors.
Jumbo-loan originations totaled $203 billion last year. If the first-quarter pace of $54 billion continues, $216 billion of jumbo loans could be written this year, according to Inside Mortgage Finance, a trade publication. About 7 percent of that first-quarter volume was bundled and sold to private investors on the secondary market.
“The jumbo market we have now was created in 2009, after the crash, and is very conservatively underwritten,” said Guy Cecala, CEO and publisher of Inside Mortgage Finance. “The good news for jumbo borrowers is in terms of underwriting or choice, the market is the best it’s been in the past five years.”
Higher fees charged by Fannie Mae and Freddie Mac are shrinking the interest-rate spread between conforming and jumbo loans, as is competition by lenders to woo high-net-worth customers. At the end of June, for example, the average interest rate for a 30-year, fixed-rate jumbo mortgage was only 0.17 percentage points higher than a conventional loan, compared with a 0.5-percentage-points difference a year earlier, according to financial publisher HSH.com.
That spread had climbed as high as 1.8 percentage points in December 2008, when the average interest rates were 5.2 percent for a 30-year, fixed-rate conforming loan and 7 percent for a jumbo mortgage.
“The spread is crazy right now. It’s so close right now,” said Randy Ernst, a vice president of mortgage lending at Guaranteed Rate. “Underwriting is still tough, but (lenders) want to do the business right now.
“It’s a risk-reward thing. You look at the client in the jumbo sector. They’re very good clients. A lot of my jumbo clients have a lot of money in the bank.”
“It’s easier than it was a year to two years ago,” agreed Eric Schuppenhauer, Chase’s head of mortgage originations.
Dr. Matthew Flak and his wife, Sarah Payne, recently decided it was time to move out of the 1,000-square-foot Chicago condo they shared with a dog and two cats, but they were unsure what kind of mortgage they could get, since Flak had a business loan tied to his dental practice.
To their delight, the couple was able to secure a jumbo loan to purchase a $657,000, 4,000-square-foot home in Orland Park, Ill. two weeks ago, which required a 10 percent down payment on a 3.75 percent adjustable-rate mortgage. They plan to refinance the loan into a fixed-rate jumbo loan before the end of the year.
“I wanted to buy a home that we were going to be in for a long time,” Flak said. “It’s a little more than I wanted to spend right now, but it’s only going to get more expensive. I didn’t want to have to buy a house and then go buy another house in five to seven years. If (the rates) go up maybe 2 percentage points, maybe it’s prohibitive for us.”
That kind of flexibility has been key to getting deals done, and it can vary from lender to lender.
For instance, Chase is offering a jumbo mortgage with an 80 percent loan-to-value to customers who have a 770 FICO score. With a down payment of 25 percent, a borrower may qualify with a FICO score of 735 or 750.
Wintrust is offering a 30-year fixed jumbo mortgage of up to $1 million to customers with a 740 FICO score and a 10 percent down payment. One existing bank customer, a local executive of an international company, had a FICO score of 650 and wanted to buy a $1.5 million home in Chicago’s North Shore area. Wintrust approved the loan, with a 25 percent down payment, and will hold it on its own books.
“You’re not seeing a secondary market for that,” said Ryan Mecum, a Wintrust assistant vice president who will close 16 jumbo purchase loans this month, twice what he did a year ago, in what he calls an “intensively competitive environment” for jumbo customers.
“In ’08, they were in a $450,000 property and would have bought a $700,000 property,” said Urban Real Estate’s Farrell. “They’ve been putting money in their savings account for five years. They’re going out and skipping that and looking at $1 million, $1.2 million homes.”