Recent delays in key secondary market regulations are among hurdles holding back the long-awaited return of the jumbo market, which some say is making some progress, but others think is too constricted by the current limits of secondary market outlets to reach a large scale.
“We are doing virtually no jumbo lending ourselves right now and there really is not much going on in the industry, primarily because there is no market for the loans,” said Rick Sharga, executive vice president at nonbank lender Carrington Mortgage Holdings.
In part he said this is because “the whole regulatory environment is problematic and there is lack of definition and a lack of transparency. There is a little bit of uncertainty of what the rules are going to be on a go-forward basis, so right now, agency loans are safe, and the market to a large extent is very much about mitigating risk there days.
“The secondary market as you know is primarily made up of institutions that are buying nonconventional loans, and most of the buying is being done by Fannie and Freddie or underwritten by the FHA, so jumbo loans—not fitting within that definition—are loans that lenders are pretty much going to have to keep on their books right now, and that is just not an attractive model for a lot of people in the industry,” he said.
But there are exceptions, and even Sharga said such challenges do not mean his company is not interested in originating the larger-balance nonagency loans someday.
Mat Ishbia, president, United Wholesale Mortgage, an affiliate of United Shore Financial Services, said his company rolled out jumbo in late last year. Redwood/Sequoia, the one issuer that consistently goes to market with jumbo deals, is securitizing some of the company’s originations of this and it has turned out to be “really a great product.”
He said new products when first rolled out tend to start off slow, but volume has “picked up nicely.” Originations have been primarily 30-year fixed-rate mortgages, as are preferred for securitization, rather than the jumbo adjustable-rate mortgages banks prefer, although the company has originated some of those, too.
“There really has been no takeout for the 30-year, so this is a breath of fresh air,” Ishbia said. But he noted that because securitization standards are so strict originating jumbo for deals “is a hard approval process, especially in the wholesale world.” As a result, he said wholesale should no longer be thought of as a lower-quality loan channel. The company originated about $30 million in May.
Ishbia said his company exercises “a lot of control” over its originations. “We try to make those controls transparent to the customer parallel to the underwriting process,” he said.
Robert Cohan, president of Beverly Hills, Calif.-based mortgage banker Carlyle Financial, estimates 80% of his company’s volume is jumbo.
“On the secondary market side I see confidence coming back as home values across the country start to bottom out and banks are starting to feel more comfortable with people’s equity in their homes,” Cohan said.
When asked about securitization, Cohan said “obviously, there is an effort there” and the credit profile is attractive.
“The scrutiny on underwriting alone is unparalleled” compared to the pre-2008 period, he said, noting that loan-to-value ratio requirements remain lower and credit score and reserve requirements are still higher.
All this is “making the secondary market look at MBS, especially on the jumbo side, as something that makes sense.”
But when asked about the bank appetite for keeping these loans in portfolio and the recent delays in plans for key regulatory moves like the qualified mortgage definition, Cohan said these obviously continue to be obstacles for the market.
He agrees that jumbos, by definition, are an “out of the box” product. As such, they can be lacking in the kind of standardization that tends to be conducive to pooling in securitizations and sales to investors.
“Each deal is looked at as an individual transaction,” he said.
That being said, while most banks are putting their jumbo loans in portfolio, “there are some sales out there, we do see it.”
Cohan confirmed some real estate investment trust and investment bank appetite for the product, which his company sells servicing released. He also said that recently there have been more different types of institutions in the jumbo market, and overall relatively more buyers.
Certain areas and loan sizes in particular have heated up recently, he said, noting that in parts of the Los Angeles area competition for homes in the $1 million to $2 million range “has seen a huge pickup.
“A lot of the big cities are seeing a little pickup on the jumbo side,” Cohan said. The rollback in the higher agency loan limits that previously has been allowed also has contributed to higher jumbo volumes, he said.
But Sharga believes in some areas “there’s probably still some concern that the underlying collateral may not be as stable in that part of the market as some others.
“We are seeing more expensive homes now entering foreclosure than we saw a couple years ago, and that sort of goes with the market,” he said.
“To a certain extent it is because those borrowers probably had the wherewithal to try to redo the loans or extend the processes, but partly because the lenders are not that anxious to foreclose on properties if there is not a resale market for it and there is not a lot of buying activity in that part of the market.”
But he added, “It is hard to tell because there is so little buying and selling activity going on” and “it’s a little bit of a 'chicken or the egg’ scenario.” The point is, he said, “there may still be some fallout from the foreclosure tsunami in that part of the market.”
Despite this, at some point Carrington will probably originate jumbo if the market for it starts to look a bit better, Sharga said.
“The environment for lending just has to be a little healthier.”
