September 10, 2015
Jumbo Changes for Jumbo Mortgages
Jumbo mortgage products have been in the headlines recently because of both a dramatic adjustment to credit standards and the probable increase in baseline jumbo loan thresholds.
Jumbo lending has picked up velocity in markets where home prices are increasing and pushing more loans across the jumbo threshold. Furthermore, this fall, the Federal Housing Finance Agency (FHFA) is likely to increase baseline jumbo mortgage thresholds for the first time in ten years.
It’s still easier to qualify for a conforming loan than a jumbo loan since conforming mortgages generally have less stringent underwriting qualifications than jumbo loans. Moreover, mortgages backed by Fannie and Freddie usually—but not always—have lower interest rates. However, that norm is shifting. One lender recently expanded its jumbo product offerings to offer a 95% LTV option without mortgage insurance on a single unit, owner-occupied purchase or rate-and-term refinance. This type of product—with its more flexible requirements—is designed to help creditworthy borrowers fit into a traditional jumbo loan. The requisite minimum credit score is 740, and the borrower needs to show 24 months of reserves and needs to use his own funds for the minimum down payment of 5%.
Other lenders are following suit and also changing the requirements on their jumbo loan products to better match their competition’s offerings, namely lowering FICO and down payment requirements. For example, a buyer with a FICO score of 680 or higher looking to purchase a single-family property can put as little as 15% down with one lender. Previously, that same lender required single-family homebuyers to have a minimum FICO of 740 with a 20% down payment. A different major lender recently decided to make jumbo loans to borrowers with credit scores as low as 680 if they have a 20% down payment, and will even make loans with LTVs as high as 89.99% under certain circumstances.
To qualify for the best rates, jumbo borrowers still need a credit score of 740-plus, while a Fannie Mae-backed mortgage borrower may only need 680 for the same rate. Additionally Fannie Mae and Freddie Mac mortgages allow down payments as low as 3% and require zero to three months’ worth of cash reserves, as opposed to typically a 20% down payment and six-to-twelve months’ reserves for a jumbo loan.
Jumbo loans drew attention after the Great Recession when analysts blamed them for inflating the housing bubble and launching the economic downturn when that bubble burst. Now, many lenders believe that this time around will be different.
Even though the current adjustment of credit standards has provoked critics, press and regulators to question whether this is a return to the standards that enabled the housing bubble of the mid-2000s, the ensuing global financial crisis of 2008, and the waves of lawsuits over home mortgages, lenders are adjusting standards with an awareness of past missteps. Even with recent volatility in the stock market, U.S. housing has a greater sensitivity to U.S. fundamentals, which are strong. Lenders note the steady gains in the U.S. economy, consumer confidence and positive housing numbers as antidotes to the possibility that adjusted lending standards will trigger a repeat of the last decade.
Another sign of recovery is the growing demand for jumbo loans. Mortgage revenue is shifting from refinancing products—which were attractive when interest rates were falling, opening opportunities for borrowers to reduce cost—to first-time mortgages for new buyers. Refinancing, which is at its lowest levels relative to new purchases since 2000, is declining quickly because of the prolonged period of low interest rates. Rates are expected to rise later this year, possibly as early as September (although a September increase now looks less likely given the market volatility of the past three weeks).
The slow-down in refinancing is also due to the saturation of that market in general. Even though rates remain very low, the number of borrowers still paying higher rates is dwindling as many have already refinanced. Therefore, banks want to increase market share in the first-time mortgage market, which means extending loan offers to “anyone who is eligible.” In other words, the industry is relaxing what some lenders say are “overly conservative” standards.
The changes to underwriting standards are particularly important for first- and second-time homebuyers looking for their first jumbo mortgage. Previously, some of these homebuyers—generally at the lower end of the jumbo range—faced a shock when they faced the lower LTV requirements for a jumbo and had to delay their next home purchase until they had saved or build sufficient equity in a current home to afford the new loans. The new guidelines smooth this transition by bringing underwriting requirements for jumbos closer to those for conforming loans.
For loan officers, real estate agents and others, this opens up a new class of buyer for homes at the lower end of the jumbo range and reduces the bright line between those shopping for conforming and jumbo loans.
Sources: “Conforming Loan Limits.” Federal Housing Finance Agency, Data Tool “Credit Unions Explore Jumbo Market.” Credit Union Times. By David Morrison. August 21, 2015. “Mortgage Limits May Increase–With home prices still climbing, baseline jumbo-mortgage thresholds may be raised for the first time in a decade.” The Wall Street Journal. By Anya Martin. July 15, 2015. “Will Wall Street’s Convulsions Impact Housing?” nationalmortgageprofessional.com By Phil Hall. August 24, 2015. “Why JPMorgan and Bank of America Relaxed ‘Jumbo Mortgage’ Rules.” thestreet.com By Tobias Burns. August 19, 2015. “J.P. Morgan Loosens Terms for Jumbo Mortgages.” The Wall Street Journal. By Annamaria Andriotis. Updated Aug. 4, 2015. “MBA: Here’s the trend for purchase applications by loan size–Affordable and 1st-time apps decline; big growth for mid-to-jumbo borrowers.” housingwire.com By Trey Garrison. April 24, 2015. “First-Time Home Buyers Are Receding.” Daily Real Estate News, a publication of the National Associations of Realtors. August 24, 2015. “Parkside Lending launches super-low down payment jumbo mortgage–Begins offering 95% LTV products without mortgage insurance.” housingwire.com By Brena Swanson. August 24, 2015. “Mortgage Limits May Increase–With home prices still climbing, baseline jumbo-mortgage thresholds may be raised for the first time in a decade.” The Wall Street Journal. By Anya Martin. July 15, 2015. “U.S. Housing: An Economic Bright Spot After a Wobbly Week.” The Atlantic. By Bourree Lam. n.d.