In­side the ever-shrink­ing jumbo loan

De­mand dries up with pan­demic

Orlando Sentinel - - EXTRA HOMES - By Ellen Chang

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.


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