Big Banks Compete with Credit Unions, Community Banks

Inman News

Jumbo lending is staging a comeback of sorts, with major lenders once again buying the oversize mortgages from other lenders or allowing independent mortgage brokers to originate loans for them.

Bank of America and Wells Fargo had already been battling each other for market share in jumbo lending this year, with BofA announcing in March it was cutting rates to make more of the loans, which are too big for purchase or guarantee by Fannie Mae and Freddie Mac.

Now JPMorgan Chase & Co. has resumed buying jumbo loans made by other “correspondent” lenders, and Citigroup is offering jumbo loans through mortgage brokers, Bloomberg reports.

Those practices, common during the housing boom, all but vanished when the secondary market for loans not backed by Fannie, Freddie and Ginnie Mae withered in August and September 2007.

“The whole market has improved in the last 90 days,” said Terry Erwin, chief lending officer for KeyPoint Credit Union, a jumbo lender founded in 1979 to serve electronics industry workers in California’s Silicon Valley.

The lack of a secondary market has meant that lenders have to keep the jumbo loans they make on their book as investments. That can create capital constraints that limit lenders’ ability to make new loans.

Credit unions and community banks that are able to make jumbo loans against their customers’ deposits have reportedly been doing more business in many markets. Lenders that aren’t selling loans to Fannie Mae and Freddie Mac don’t have to deal with new rules for appraisals that real estate trade groups say are derailing sales.

But many jumbo borrowers are still paying higher interest rates and facing tougher underwriting standards on the loans than in the past.

Although jumbo loans have remained available to borrowers with good credit making sizable down payments, rates for jumbo loans have been 1 percent to 1.5 percent higher than conforming loans, and many lenders are expecting FICO scores in the 700s.

Erwin said KeyPoint competes with Bank of America and Wells Fargo for jumbo borrowers in the San Francisco Bay Area, tracking their rates and fees.

“We try, if we can be, to be within a quarter (percent) or the same” as its larger competitors, Erwin said.

To address the potential liquidity shortage, lawmakers last year allowed Fannie, Freddie and the Federal Housing Administration to guarantee loans of up to $729,750 in high-cost housing markets.

The upper loan limit, which had previously been set at $417,000 for Fannie and Freddie, was briefly rolled back to $625,500 on Jan. 1 amid false expectations that the secondary market for jumbo loans would make a comeback. The limit has since been restored to $729,750.

Although so-called “super conforming” loans between $417,000 and $729,750 are cheaper than jumbo loans that can’t be securitized and sold to secondary market investors, Fannie and Freddie have imposed additional conditions on them.

The guidelines published by Fannie and Freddie in March and April generally require that borrowers have FICO scores of at least 700 and provide at least a 10 percent down payment. Freddie Mac requires down payments of at least 20 percent for loans above $625,500.

Super-conforming loans backed by the Federal Housing Administration allow borrowers to make down payments of as little as 3.5 percent. The trade-off is that those borrowers will pay additional mortgage insurance premiums that are based on the size of the loan.

With Fannie, Freddie and Ginnie Mae helping provide liquidity in the super-conforming jumbo market, sales of high-end homes in high-priced California markets picked up in May (Ginnie Mae guarantees payments on mortgage-backed securities backed by the Federal Housing Administration).

In the nine-county San Francisco Bay Area, sales of homes financed by mortgages larger than $417,000 accounted for one in four sales, the highest proportion since October, MDA DataQuick reported. Those numbers were a far cry from two years ago, when sales of homes financed by jumbo mortgages accounted for more than 60 percent of sales in the region.

In Southern California, roughly 12 percent of home sales in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties were financed with jumbo loans in May, compared with 40 percent during the boom.

Turning to credit unions

Eileen Bartlett, a California licensed real estate broker, says jumbo lending never went away. But for a while, “people didn’t know where to go to get the money.”

Bartlett, whose broker’s license also authorizes her to negotiate loans, touts credit unions as a good alternative to major banks for jumbo loans.

“Even when (jumbo) rates were astronomical, I could get rates that were close to jumbo conforming all along,” Bartlett said.

Although borrowing from a credit union means becoming a member, the rules for joining have been relaxed to the point where merely living or working in a credit union’s service area is enough to establish eligibility.

“There is a big difference dealing with a bank that has to report to stockholders and a credit union that is a not-for-profit,” Bartlett said. “They remind me of how banking used to be about 20 years ago. I can go in with a common-sense loan and get a deal done.”

Bartlett said she has also done consulting work for KeyPoint, which does most of its mortgage lending in four counties ringing San Francisco Bay: Santa Clara, San Mateo, Alameda and Contra Costa.

“Anything east of that looks pretty tough right now,” Erwin said. Fast-growing suburbs and bedroom communities that sprang up far from job centers during the housing boom have been some of the areas hardest hit by falling home prices and foreclosures.

“That’s what’s hurting people,” Erwin said of the difficulty obtaining a jumbo loan in a declining market. “When you have foreclosures in your neighborhood, the appraiser uses that instead of a normal comp.”

Steven Stapp, president and chief executive officer of San Francisco Federal Credit Union, says the lender’s jumbo loan volume is 25 to 30 percent higher than in years past. He suspects that trend will hold for the next couple of years.

Traditionally, he said, many borrowers have considered credit unions primarily as a place to refinance their mortgages. Now, he said, “we’re starting to see more purchase loans coming our way.”

Although it could sell conforming and “super conforming” loans eligible for purchase and guarantee by Fannie and Freddie into the secondary market, San Francisco Federal Credit Union is also keeping the majority of loans under $417,000 that it originates in its portfolio, he said.

The credit union is looking for good FICO scores and down payments of 20 percent on conforming loans and 30 percent on jumbo loans.

“We know that’s a pretty high standard, but we haven’t really changed the criteria for the last 10 years,” Stapp said. “Our mortgage portfolio is performing very well for us.”

Erwin said KeyPoint will make jumbo loans of up to $1 million with as little as 20 percent down, and loans of up to $1.5 million with 25 percent down. But, he said, the average down payment is more like 30 to 35 percent, and KeyPoint wants to see FICO scores of 700, instead of the 680 that was the norm in better days.

Those high standards are one reason credit unions can still make jumbo loans today.

“We are really trying to look for loans and borrowers we can put on our books and our balance sheet,” Stapp said. “We are putting those on our portfolio, and taking on 100 percent of the risk of the loan.”

On an institution-by-institution basis, credit unions and community banks may look like small players in the jumbo loan market. Stapp said San Francisco Federal Credit Union makes about four or five jumbo mortgage loans a month, and won’t make loans larger than $1.3 million. Erwin expects KeyPoint to make $50 million in mortgage loans this year, most of them jumbos.

But cumulatively, the impact of the thousands of credit unions and community banks around the nation is much larger.

According to the National Credit Union Administration, the nation’s roughly 5,000 federally chartered credit unions hold $442.4 billion in assets, and another 3,000 state-chartered credit unions hold $360 billion in assets. NCUA estimates that loan volume at federally chartered credit unions grew 7.7 percent from 2007 to 2008, to $528.6 billion, with a 14.5 percent increase in first mortgage and real estate loans and lines of credit.

Realtor and builder industry associations say new rules governing appraisals conducted for loans destined to be bought and sold by Fannie Mae and Freddie Mac have been derailing many home sales since they went into effect on May 1.

The new rules, designed to prevent lenders from pressuring appraisers to inflate home values, mean that appraisals in declining markets are often unrealistically low, industry trade groups say.

But the Home Valuation Code of Conduct, as the new rules are known, doesn’t apply to jumbo, FHA or VA loans. So credit unions haven’t been forced to change their appraisal process when making loans they expect to keep on their books as investments.

“We’ve never sold to Fannie and Freddie,” Erwin said. “We have appraisers we’ve used for year that know us. We tell them we want the fair value — what it’s worth today — and don’t put any pressure on them.”

One thing Erwin does expect from appraisers is current comps, or comparable properties. If a comp is four months old, appraisers must take that into consideration.

“For awhile, they weren’t doing that,” he said. “I had to go out and make them.”

KeyPoint loans primarily to members, but also works with mortgage brokers like Bartlett.

“If they shop around, we will get them a good rate or send them where they need to go to. That’s the nice thing about competition,” Erwin said.

Jumbo ARMs

Erwin said most of the jumbo borrowers coming to KeyPoint are choosing 5/1 hybrid adjustable-rate mortgages, which carry a fixed rate for five years before converting to a loan with a rate that adjusts annually. The rate is tied to performance of an index such as the London Interbank Offered Rate (LIBOR) or one-year Treasury bills.

With short-term rates near historic lows, “people tied to LIBOR or one-year Treasurys right now, they are happy campers,” Erwin said.

Hybrid ARMs offer a lower rate now — based on the variable index being used plus an additional margin — with the risk of higher payments in the future. KeyPoint was offering 30-year fixed-rate jumbo loans of up to $2 million for 6 percent on Monday, with an origination fee of 2 points. A 5/1 ARM with the same number of points and a two-year prepayment penalty was available for 5.25 percent.

Sophisticated borrowers may even want to consider a jumbo loan that starts right out as an ARM loan, without an introductory fixed rate, said Paul Wylie, the founder and former chief executive officer of Metrocities Mortgage LLC.

Bank of America subsidiary Merrill Lynch offers a “PrimeFirst” one-month adjustable-rate LIBOR-based mortgage (LIBOR is an acronym for the London Interbank Offered Rate), for example, which as of Monday carried a rate of 1.75 percent on loans up to $2 million. The 25-year mortgage offers the option of making interest-only payments for the first 10 years, but the interest rate begins tracking LIBOR right away, without the fixed introductory rate of a 5/1 hybrid ARM loan.

Wylie, who now operates a Web site, Liborated.com, that provides information and strategy about the various LIBOR indexes, said such loans aren’t for everybody. With long-term rates also near historic lows, it can be a good time to lock savings on a fixed-rate loan.

“In this environment for residential loans, the vast majority of borrowers are choosing a fixed-rate mortgage,” Wylie said. “We think that’s terrific for conforming and FHA loans, but especially for jumbo and super-jumbo borrowers — we think it’s important for them to have this information and to consider all options.”

An ARM loan indexed to LIBOR or another index may be a good choice for those who have the financial means and the psychological temperament required to assume the additional risk, which Wylie compared to choosing an insurance policy with lower premium payments but higher deductibles.

While the one-month LIBOR is currently around 0.3 percent, it was at 5.72 percent as recently as September 2007, and reached nearly 7 percent in 2000, according to Liborated.com.

Wylie said the million-dollar mortgage on his own Southern California home is pegged to the one-month LIBOR plus 1.5 percent, meaning he’s paying a little more than 1.8 percent now, but would have been paying more than 7 percent two years ago. Merrill Lynch’s PrimeFirst loan caps out at 12 percent.

“We don’t expect one-month LIBOR to stay there — we expect it will go up. It’s just a matter of time,” Wylie acknowledged. Most ARM mortgages that use LIBOR as an index are tied to the one-year LIBOR.

But short-term rates rarely move in lockstep with long-term rates, so ARM borrowers who want to move into a fixed-rate loan may still be able to take advantage of low rates, Wylie said. Rates on 5/1 hybrid ARMs haven’t been over 6 percent in a decade, he said, so a jumbo ARM loan could be a viable long- or short-term option.