Jumbo Mortgages Are Coming Back, Especially in High-Cost Areas
As the real estate market recovers, high cost metropolitan areas have seen a ramp up in homebuying activity which drives jumbo lending volume, says Ghazale Johnston, a managing director with Accenture Credit Services.
“Many investment banks and brokerage firms view mortgages as a growth area," she says.
Data continue to confirm a widespread expectation to simultaneously see lenders prepare to comply with the new risk adverse qualified mortgage rule requirements and renew focus on lower risk jumbo loan originations that are less expensive to originate.
For example, the 3Q13 National Mortgage News list of second lien lenders ranked by average loan size starts with Ridgewood Savings Bank, Ridgewood, N.Y., whose jumbo loans increased 98% to $200,000 up from $101,250 in the same quarter of 2012.
TD Bank, Portland, Ore., which is very active in the New York area, also reported a significant average loan size increase of 41% starting from a much lower basis of about $50,000 in 2Q12 to $70,500 in 3Q13.
CitiMortgage, Inc., saw a much less significant increase of 14%. The average loan size reported for the same quarter was almost $170,000.
Bank of America was the only other major bank that also increased the average loan size, albeit only 9%, from roughly $104,000 to $113,500.
The increase of the conforming loan limit for high-cost areas to $729,000 until late 2011 followed by the return to the loan limits for high-cost areas shows the debate over loan limits is not over.
Geographically, according to CoreLogic, to no one's surprise California leads as the state with the highest number of jumbo loan originations and volume, followed by Virginia and New York.
Most outlooks, including a yearend 2013 prediction from the Mortgage Bankers Association, suggests loan originations will decline by over 32% in 2014 to $1.2 trillion due to a significant decline in rate-sensitive refinance transactions, while purchase transactions are expected to grow by only 9%.
Mortgage bankers seem "less concerned than mortgage finance investors," according to an MBA analyst, because many mortgage bankers switched focus in the past two years while big retail banks took over refinancing "so the impact of declining refinance transactions is less damaging." Small-size banks and credit unions are getting ready for the market switch, too.
As growth opportunities wither before investors' eyes, they are changing strategies accordingly.
"Investors want to have mortgages in their arsenal of products so that they can meet the needs of their high net worth clients and in the process, generate a healthy revenue stream," Johnston says.
In the past, they often referred jumbo mortgage loan clients to retail banks, she adds, but that source "has largely dried up since many retail shops have considerably shrunk" the jumbo lending part of their business.
Another advantage in the absence of other low risk products is an equally strong appetite to securitize jumbo loans.
In Johnston's view, slowly but surely the secondary market for jumbo mortgages is starting to come back.
"As the quality of loan production improves across the industry, investors have increased confidence in securitization," she says. So even though over 90% of mortgage loans in the U.S. are still sold to Fannie and Freddie, "some investors are starting to get their toes wet," Johnston continues, increasing demand in the secondary market.
Securitization demand increases, on the other hand, are bound to drive up jumbo loan origination, she adds.
Another less drastic yet promising loan origination growth opportunity appears to emerge in home equity lines of credit lending.
At over $54 billion the 3Q13, volume of HELOCs increased over 13% on a quarterly basis and a staggering 54.5% compared to the same quarter of 2012.
Even though home price appreciation gains are not evenly spread, in some areas changes simply are making up for the drastic loss in home values during the crisis, while in other areas already are raising price bubble concerns.
Recent reports suggest some regional banks are facing losses on HELOCs scheduled to reset in the near future.
The consensus, however, is that residential real estate prices will continue to improve in 2014.
“HELOCs are definitely coming back and are a growth area for retail lenders," Johnston notes. "Many banks are making a push for homeowners to refinance these loans while interest rates are still relatively low. Once draw periods expire, rates will likely be higher and the potential for default increases.”