Inside the ever-shrinking jumbo loan
Demand dries up with pandemic
The jumbo loan market is shrinking as some mortgage lenders are facing a liquidity crunch. It’s the perfect storm for lenders as millions of homeowners are seeking forbearances after losing their jobs from coronavirus shutdowns and investors who buy bundles of jumbo mortgages have exited the market.
Jumbo loans are mortgages for expensive homes that are above the limits set by the government agencies that back a wide swath of the home loans issued by U.S. lenders. The maximum for a conforming loan is $510,400 in most counties, as set by the Federal Housing Finance Agency.
Demand for jumbo mortgages has dried up as investors turn to mortgage bonds for governmentbacked loans where “they’re assured of receiving payments even if large numbers of borrowers are in forbearance,” says Greg McBride, Bankrate chief financial analyst.
“Most mortgages get made by lenders who then sell it to someone else,” he says. “If there is no willing buyer, lenders will stop closing loans so as not to be stuck holding the bag.”
Mortgage companies such as Wells Fargo have halted the purchase of jumbo loans that originate from other lenders, but not “direct-to-consumer originations through their retail mortgage channel,” Tom Goyda, senior vice president, consumer lending communications at Wells Fargo, told Bankrate.
“Due to unprecedented market conditions, Wells Fargo Home Lending is temporarily suspending the purchase of nonconforming mortgage loans from correspondent sellers, effective immediately and until business conditions stabilize,” he said in an email statement. “This difficult business decision reflects efforts to prioritize how we serve customers and maintain prudent balance sheet discipline.”
Some large lenders are still offering jumbo loans to consumers, however. Citi spokeswoman Maggie Monaghan told Bankrate that the bank is still offering jumbo loans.
Forbearance programs creating a crisis for mortgage servicers
The CARES Act enacted by Congress in March gave homeowners with federally backed loans two types of temporary relief. One reprieve prevents lenders from beginning the process of foreclosures only on federally backed loans for 60 days starting March 18.
The other reprieve allows homeowners the ability to request 180 days of forbearance for their mortgage and the option to ask for another six months if they are still experiencing hardships.
The companies that service the mortgages, however, must continue to make the payments to investors during the forbearance period, and that may lead to a liquidity crisis for lenders without sufficient reserves to cover the shortage. Only conforming loans backed by Fannie
Mae and Freddie Mac, which back the majority of U.S. mortgages, are protected from losses if homeowners do not pay.
Jumbo loans, known as nonconforming loans, range from over $510,400 to $765,600 in more expensive metro areas such as New York, California and Washington. These loans are riskier because they are not guaranteed by Fannie and Freddie, so if a homeowner is unable to pay, the lender faces a greater loss.
The demand for jumbos has “dried up” from investors who are seeking mortgages backed by Freddie, Fannie and Ginnie Mae. Mortgages backed by these agencies will receive the regular monthly cash flows even if borrowers are in forbearance, McBride says.
“While it is not a permanent state, it isn’t an overnight fix either,” he says. “The wider spreads on jumbo mortgages relative to conventional loans that began during the financial crisis lasted for the better part of the next five years.”
The decline in jumbo loans being available will also affect homebuyers seeking 30-year mortgages and refinancing, he says.
What prospective jumbo borrowers can do
The uncertainty about the future of the economy, jobs and how this downturn will affect the value of home prices is shutting down the jumbo loan market, says Matt Hackett, operations manager of Equity Now, a New Yorkbased direct mortgage lender for loans in New York and four other states.
“Investors in the jumbo market are certainly concerned about potential mandated payment holidays,” he says.
Homebuyers and homeowners who have not closed on a jumbo mortgage loan could face delays and other setbacks. Those seeking a jumbo loan will have to cast a wider net to find a lender who is willing to underwrite the loan.
“Check with your lender to make sure your rate is locked and that you are all set for closing. You don’t want to be left standing at the altar,” McBride says.
The mortgage broker community has seen a rash of loans that were previously approved get denied because of newly added lender overlays, says Richard Liu, a mortgage consultant for C2 Financial Corp., a San Diego-based mortgage brokerage. Overlays are additional criteria on top of conventional and government lending guidelines.
“Images of the financial crisis come to mind when lending in the environment we’re in right now,” he says. “For self-preservation, no lender is willing to take the risk of not being able to sell a loan to a mortgagebacked security investor.”
People looking to buy or sell their home right now should expect a slower market because of the current uncertain economic headwinds.
“Contrary to what some of the media is reporting, rate quotes should be taken lightly as the volatility in the secondary market is like we’ve never seen,” Liu says. “If a homeowner is looking to purchase or refinance, always go with a trusted mortgage broker.”
Aside from shoring up a larger down payment to bring down the amount of the mortgage, homeowners who live in cities where a jumbo loan is the norm have limited options, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.
“There’s nothing similar to a jumbo loan,” he says.