Over the past week, news leaked out that Wells Fargo was putting tighter restrictions on its jumbo mortgage offerings. Although no official statement was put forth, the San Francisco-headquartered lender affirmed reports from the Wall Street Journal and Reuters that it would stop purchasing jumbo loans made by third-party mortgage bankers and would only refinance jumbo mortgages for customers with at least $250,000 in liquid assets in the bank.
Wells Fargo is the jumbo mortgage sector’s largest player, with $70 billion in volume last year. Of course, Wells Fargo is in a distinctive situation not shared by the other large banks – its balance sheet has been restricted to a $1.95 trillion cap since 2018 by the Federal Reserve as a result of its 2016 retail banking scandal. But its decision to pull back significantly from the space raised doubts on the product’s viability during the coronavirus-induced economic mayhem.
However, it appears the jumbo mortgage market still has a degree of resiliency. While no one denies the sector is facing difficulties, the product is still available from lenders that continue to appreciate its value.
Jumbo mortgages fall outside conforming loan restrictions because their high dollar figures exceed the maximum amount backed by Fannie Mae or Freddie Mac. Unlike conforming loans, jumbo mortgages are not securitized into the secondary market by the government-sponsored enterprises. Ginnie Mae securitizes these loans through its pass-through Ginnie Mae II mortgage-backed security, which is collateralized by multiple-issuer pools using loans from government programs including FHA and VA.
It should be noted that the new challenges facing this sector are not rooted in the underlying quality of the mortgages.
“The credit quality of these jumbo loans is going to remain reasonably good through this downturn,” predicted Joshua Steiner, managing director at Hedgeye Risk Management in Stamford, Connecticut. “Jumbo borrowers tend to be the most affluent people who have the highest resources and are in the best position to be able to weather the storm.”
Steiner acknowledged that while the quality of the loans may be sound, lenders have been spooked by the ongoing economic tumult and are not pursuing anything that could be mistaken for a risk.
“The Mortgage Bankers Association just came out with their Mortgage Credit Availability Index update,” Steiner continued. “And they found that in March, the mortgage credit availability for jumbo loans dropped by 37%. By contrast, their conforming index, which would be Fannie and Freddie, fell by 3%. So that gives you a little bit of a taste of just how reluctant jumbo lenders are right now and how much they’re tightening the screws from an underwriting standpoint.”
Steiner pointed out that while some lenders acquire jumbo loans through wholesale origination platforms, “the traditional jumbo market has always been a portfolio product, meaning that most jumbo loans that are originated are held on balance sheet by the lenders.” Jumbo lenders that were able to sell their loans to investors before the pandemic are facing a different environment today.
“All residential mortgages are viewed negatively right now,” lamented Anthony B. Sanders, professor of finance at George Mason University in Fairfax, Virginia. “But times are tough for non-GSE firms like Redwood, one of the leading jumbo mortgage companies. Redwood Trust, a REIT, has fallen from around $18 per share in March to just $3.08 today.”
Mortgage brokers are also shouldering a degree of collateral damage from this situation. For example, Grant Stern, founder of Morningstar Mortgage Corp. in Bay Harbor Island, Florida, encountered a new reticence from lenders that were previously eager to assist his affluent clients in Miami’s luxury housing market.
“I have to be diplomatic about it: they stopped offering the jumbo,” he complained. “It’s like nobody wants to hold more risk and hold it to maturity.”
Stern added that while he was not encountering the same problems with conforming mortgages, “the jumbo bucket is spilled all over the floor.”
Still, that’s not to say that the jumbo market has completely disappeared. Several lenders still active in the market conceded that while today’s scene is not business-as-usual, at least there is still business to be found.
“We’re absolutely still originating jumbo,” said Glenn Brunker, executive director at Ally Home in Charlotte, North Carolina. “That’s one of our primary lanes. We are very active in the jumbo space not only in terms of new originations, but also aggregation. One-third of our unit production is jumbos.”
Brunker identified his jumbo clients in the “higher real estate value markets and predominantly coastal areas, with a strong slant to California.” He also stated Ally was “seeing first-time homebuyers return to the jumbo space and, obviously, a traditional refinance during these unprecedented times.”
Ally puts its jumbo loans into its portfolio, and Brunker stressed the company constantly monitors the loans and has found “our credit quality of that jumbo space is very, very strong.” In the event the coronavirus chaos permeated these loans, Brunker said Ally is offering a 120-day forbearance plan for its consumers, adding that “we don’t anticipate any long-term impact.”
At New York City-based Better.com, jumbos make up about 5% of total origination and remain an active niche for well-heeled customers.
“Yes, we are still originating with slightly tighter standards,” said Emanuel Santa-Donato, director of capital markets at Better.com. “So, we’re not going to go above 80% LTV on jumbos because those are some of the loans that got into the most trouble during the financial crisis and there’s some scar tissue around there. And the banks we’re working with don’t want to buy those anymore.”
Santa-Donato affirmed that many investors have become “very, very skittish about consumer credit,” although the company has been able to sell to banks that are willing to put the loans in their portfolios. The high quality of the loans helps ease that anxiety, he added, because jumbo mortgages “tend to require a lot of reserves” and borrowers need to have between three to six months of capital in the bank.
“The bank is more comfortable with the credit that we’re producing instead of something that sort of trashed and sliced up from various lenders,” he said. “And banks also have access to lots and lots of capital through their deposits through the Fed right now. So, they have the liquidity to put these on their balance sheet.”
A niche within a niche are VA jumbo mortgages. Veterans United Home Loans originates these loans and has an easier time getting them securitized due to the VA connection.
“VA jumbo loans are different than non-conforming jumbos in a key way: VA jumbo loans can be securitized, in this case through Ginnie Mae,” said Chris Birk, director of education. “These loans still receive a VA guaranty and look similar to most other VA loans. Non-conforming loans cannot be securitized through the GSEs.”
Birk also pointed out that changes to the VA loan program have helped expand lending into jumbo territory.
“Legislation that took effect at the start of the year also removed the VA’s loan limits for qualified veterans, who can now borrow as much as a lender is willing to extend without the need for a down payment,” he continued. “Nationally, about eight in 10 VA buyers purchase with no money down. Despite that, VA loans have had the lowest foreclosure rate on the market for most of the last decade, according to Mortgage Bankers Association data.”
Troy, Michigan-based Flagstar Bank is also originating jumbo mortgages. However, Kristy Fercho, executive vice president and president of mortgage at Flagstar, and 2020 vice chairwoman of the Mortgage Bankers Association, admitted the company was evaluating the viability of the product.
“There really is no kind of third-party outlet for jumbo, except for really big balance sheets,” she explained. “We don’t have the same balance sheet sizes as certainly a Wells or Chase or Bank of America. But we’re still doing jumbo loans to be able to support our customers, but I think it is going to be a little more challenging in this market until some of the liquidity comes back.”
Prior to the pandemic, Fercho continued, Flagstar generated 11 jumbo securitizations since 2017 that attracted investor interest from insurance companies, hedge funds and private equity funds.
“We like the business and I think it was a very robust market,” she stated. “There certainly is a need for it, and it is my hope is that it would return and stabilize.”
But what will happen to the jumbo mortgage market when the pandemic crisis has abated and the economy opens up again? Joel Kan, MBA associate vice president of economic and industry forecasting, predicted the economy will need to fully recover before this sector regains strength.
“We’re essentially in a recession right now, with the worst still to come,” Kan said. “And the outlook for purchase origination is down more than a little bit.”
Tendayi Kapfidze, chief economist at LendingTree Inc. in Charlotte, N.C., agreed that the long haul will be a rocky road.
“With the health crisis, there’s real damage being done to the economy and it’s not going to snap back as quickly as it contracted,” he explained. “There’s going to be much more scrutiny around credit risk. So, probably, the jumbo market is going to be smaller because of that. And we’re likely to see, at least for some period, some weakness in demand and therefore some weakness in home prices.
“Consumers’ confidence is going to take a big hit,” Kapfidze added, “I think people are going to be saving more and be less inclined to make home purchases – and those that do might be a little bit more conservative on how much money they’re willing to spend or how big an obligation they’re willing to take when they do purchase a home.”