The Jumbo-Mortgage Comeback

Some Areas Are Seeing the First Signs of a Resurgence in High-End Home Loans

The Wall Street Journal

8 November  2010

Banks are starting to make “jumbo” mortgages again.

When the credit crisis hit more than two years ago, many banks cut back or stopped making loans for more-expensive homes. Now, smaller and regional lenders are issuing more new jumbo loans and doing more refinancings—as are some big banks that never stopped making them. If the trend continues, it could help bolster home sales in some wealthier areas.

In the second quarter of 2010, jumbo-mortgage lenders originated $18 billion in loans—a 20% increase from the first quarter. Jumbo lending still remains far below 2007 levels, according to Inside Mortgage Finance Publications Inc., an industry data provider.

J.P. Morgan Chase & Co.’s Chase Home Lending unit increased its jumbo-mortgage volume by 146.2% in the first six months of this year over the same period a year earlier, and Wells Fargo & Co. by 47.5%, according to Inside Mortgage Finance. PHH Corp. of Mount Laurel, N.J., a mortgage originator and servicer, issued 64.6% more jumbos in that period.

“Overall lending for mortgages is up, and jumbos are up more,” says Thomas A. Kelly, a Chase spokesman. “Part of it is that we have the capacity and we are making it available to our customers.” But, he adds, “we are still using very disciplined underwriting and we want to make sure that you have an ability to repay the loan.”

Jumbo mortgages are those that are too big to be bought by government-backed agencies such as Fannie Mae and Freddie Mac. The limits vary by region, though they generally are mortgages that exceed $417,000. In high-cost metro areas, including New York and San Francisco, jumbo loans are generally those that exceed $729,750. The limits can be even higher in Alaska and Hawaii.

Turning to Smaller Banks

Many jumbo borrowers are still finding it frustrating to get a loan. Some of them, encountering backlogs and processing delays at larger banks, are turning to smaller ones, such as Investors Bancorp Inc. in Short Hills, N.J. Peter Elsby, a senior loan officer at Investors Bancorp’s mortgage unit, which operates in 16 states, says many national banks are taking two to four months to process a mortgage, while his bank can turn one around in 30 to 60 days. “Their turnaround time is just way too slow,” he says of the big banks.

Borrowers seeking jumbo mortgages for condos or vacation properties also may be better off using a local lender or contacting a mortgage specialist, as many big banks are still making it very tough for those buyers to qualify or have drastically reduced their lending activity.

Robert Flaxman, a 54-year-old real-estate developer in Laguna Beach, Calif., says he is refinancing his $5 million mortgage, which has an interest rate that adjusts monthly. His new loan will be another adjustable-rate mortgage with a fixed interest rate in the 3.75% to 4% range for the first five or seven years, and adjusting annually thereafter.

A few years ago, Mr. Flaxman says, he could have gotten a jumbo mortgage from just about any big bank, but since the credit crisis he has had to go to private banks catering to high-net-worth clients. He is working with a specialist, Luxury Mortgage Corp., based in Stamford, Conn., and licensed in 19 states, because “they have a smorgasbord of options.”

Real-estate professionals in areas that haven’t been greatly affected by foreclosures say the somewhat improved availability of jumbo mortgages is helping revive sales of expensive homes.

“The jumbo market is starting to loosen up,” says Candace Adams, president of Prudential Connecticut Realty, who says she noticed the change only in the past 60 days.

Ms. Adams says lenders in Fairfield County, Conn., which includes the affluent communities of Greenwich, Darien and Westport, have reduced down-payment requirements to 20% from 25%, and more lenders are vying for customers. Many buyers of homes worth more than $1.5 million are opting for adjustable-rate mortgages with a seven- or 10-year fixed rate as low as 3.5% that then adjusts annually, she says.

“In the third quarter of 2010, there was an increase of 27.4% in single-family home sales, a significant increase over last year,” Ms. Adams says. Much of the boost came from price cuts and federal tax incentives that expired earlier this year, but the greater availability of jumbo loans—and so-called superjumbos, or loans of at least $1 million—also was a factor, she says.

In other parts of the country, such as the San Francisco Bay area, jumbo loans are still hard to get, weighing down sales, experts say. John Walsh, president of MDA DataQuick, a San Diego-based provider of real-property information, says the share of purchases in the high-priced San Francisco area financed with jumbo mortgages is still falling.

A Growing Demand

The banks credit greater borrower demand elsewhere on falling interest rates, which recently reached historic lows. The average jumbo rate through the week ended Oct. 29 was 5.11%, down from about 6.14% on Jan. 1, 2010, according to financial publishers HSH.com. And the spread between jumbo and ordinary loans, which had reached as much as 1.8 percentage points in December 2008, is now just 0.74 point.

The total volume of jumbo loans is way down from a few years ago. Jumbo mortgages constituted 5% of total mortgage originations in 2009 and 2010, versus 20% from about 2004 to 2007. Historically, they comprise about 18% of mortgages issued, says Guy Cecala, CEO of Inside Mortgage Finance.

Underwriting continues to be strict: Borrowers still need excellent credit profiles and must provide complete documentation and verification of income, unlike several years ago. Down payments of 20% to 40% typically are required.

Tim McLaughlin, senior vice president of capital markets for Weichert Financial Services in Morris Plains, N.J., says he doesn’t expect the traditional jumbo-mortgage market to return to normal until institutions can get back to developing and selling bonds based on the mortgages in the financial markets, instead of simply holding the mortgages in their portfolios. That could take another year or more, Mr. McLaughlin says.

“We need investors to be confident in the assets they are purchasing,” he says.