Race to the bottom? Nonbanks ease standards to compete for 'super' jumbos
An uptick in private investor liquidity is bringing more nonbank lenders into the market for super jumbo mortgages, often with weaker credit standards than the banks that traditionally dominate this niche.
Super jumbo mortgages, loosely defined as loans with an original balance of more than $1 million, are often offered by banks to build tight-knit relationships with high-net-worth customers in their private banking and wealth management divisions.
But nonbanks, which in recent years have seen their influence and market share grow considerably, are now starting to gain traction with super jumbos.
The total number of super jumbo originators — nonbanks, as well as banks and credit unions — grew 15% in June 2018 over the previous year, according to estimates by Optimal Blue, a provider of loan product and secondary market data and technology.
Nonbank super jumbo originators, which Optimal Blue estimates number in the "few hundred," grew 10% year over year and now outnumber depositories by a 2-to-1 margin.
Banks that offer super jumbos tend to hold the loans in portfolio. But the rise in nonbank activity is being driven by private-label secondary market investors that are willing to buy super jumbos for both whole loan and securitized investments. The number of nonbank investors and aggregators that offer super jumbos was 60% higher in June than it was a year ago, Optimal Blue said.
Recent loan performance has been strong for mortgages originated at $2 million to $3 million, said Vince Furey, senior vice president, lending solutions at OpenClose, an origination software company. That's emboldened the secondary market appetite for even higher- balance loans.
"The market to securitize those high loan balances is there now, where it really wasn't before. Liquidity drives everything," Furey said.
The investor universe is still small; Optimal Blue estimates less than 50 investors and aggregators are actively purchasing super jumbos. Banks make up the vast majority of investors, but their market share of loan purchases by dollar volume slipped to 80% in June, from 85% a year ago. Nonbanks' market share grew to 17%, from 12%, while credit unions held roughly 3% of the market, Optimal Blue said.
Nonconforming mortgages accounted for about 11% of loans originated using Optimal Blue's product and pricing engine in June, unchanged from a year ago. However, super jumbos accounted for 13% of all nonconforming lending, down from 17% a year ago.
Nonbanks originate 55% of the dollar volume of super jumbo mortgages. Despite the much lower number of originators, banks and credit unions account for 45% of super jumbo lending by dollar volume because their average loan size tends to be higher than nonbanks, according to Optimal Blue.
The number of nonbank super jumbo lenders is in the low hundreds, Optimal Blue estimates. Among them is the Denver-based direct lender Eave, which offers mortgages with a $20 million loan limit, and LoanStream Mortgage, which offers products with loan amounts up to $10 million.
Caliber Home Loans rolled out Elite Access, with a $3 million limit that allows for a 95% LTV with no mortgage insurance and 700 credit score. The Dallas-based lender cited rising home values as one reason for creating the product.
Other niche products, including home equity lines of credit up to $3 million, are also hitting the market.
"But home values don't mean anything if there's no marketable liquidity for the product. The marketable liquidity is being driven by confidence in the values," Furey said.
In addition to raising maximum loan balances, lenders are easing other terms as well, including going up to 95% loan-to-value ratios. If a borrower has a large enough nest egg of liquid assets, some lenders are also willing to forgo traditional employment and income verifications.
"Overall, these specialized products that didn't exist three years ago have expanded dramatically, as rates rise and refinance volume shrinks," Furey said. "These unique niche products are picking up a segment of purchasers that may have been locked out of the market."
Some lenders are mitigating risk through cross-collateralization of the borrower's properties, Furey said. For example, a borrower can use their equity in other properties or assets as collateral for the new super jumbo loan.
Despite the looser underwriting and large loan balances, lenders and investors don't appear to be particularly concerned about taking on the additional risk. Rather, they view the product as a strategy opportunity to reach a borrower segment unserved by banks.
Verus Mortgage Capital, a correspondent aggregator headquartered in Washington, D.C., is offering loans $5 million for borrowers previously locked out of jumbo financing. "Their alternatives are cash or private money loans," said its president, Dane Smith. "We've seen the borrower demand. They're great loans, great borrowers, they have really attractive credit risk profiles."
The higher loan amounts even apply to credit-impaired borrowers, where the previous limit was $2 million. Verus purchased a few of these loans on a test basis, liked the borrower profile of the applicants and decided to offer the program on a broader basis, Smith said.
There are a number of factors for the recent popularity of these loans, he said. "People that are doing well, the economy's doing well, they're looking to buy a house and but they recognize or are surprised when they don't fit into a traditional box. They may not have assets to qualify for super jumbo bank financing."
As a result, money-center banks are not Verus' competition for these loans.
The growth has been all along the credit spectrum. "There are a lot of common-sense loans out there, and if we can find a common-sense loan to buy in the super jumbo space, we will do that," Smith said.
Luxury Mortgage, a Stamford, Conn.-based subsidiary of Tiptree Financial, just expanded its guidelines for the nonqualified mortgage jumbo offerings, moving to a $4 million loan limit from a $3 million limit established when the program was rolled out in January.
On the prime jumbo side, it will do up to $5 million, but it will go above those amounts in both programs on an exception basis, said CEO David Adamo.
"There's been a proliferation of expanding guidelines to accommodate these larger loan balances, particularly the ones that fall outside of traditional prime jumbo credit guidelines in the non-QM product categories," Adamo said. "There are just things you can do in a non-QM product to make the mortgage process more convenient and less cumbersome for the borrower than if they were to through the traditional route of a typical prime credit jumbo product."
These loans are being bundled in securitizations with those under $1 million, he said. But with each deal there are more and more super jumbo loans included and as a result of the successful execution the origination community has gotten comfortable with increasing the loan amounts.