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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2013

Are Bigger Loans Better for Business?

The time may be right to jump into the jumbo market

Are Bigger Loans Better for Business?

The housing crisis affected every corner of the mortgage industry, but especially the jumbo-loan niche. After the mortgage meltdown, credit was tight, and lenders were often unwilling to take on the additional risk jumbo loans presented. Rates for this product were high, and availability was low.
But the market seems to have turned a corner, and the trumpets signaling the return of jumbo loans have been sounded. Now just may be the right time to jump into the jumbo business.

There are many signs that jumbo is back — and in a big way. For the four weeks ending this past February 22, for instance, jumbo activity was up 60 percent year over year, according to Mortgage Daily. For further perspective, lenders issued an estimated $148 billion in private jumbo mortgages in the first nine months of 2012, a year-over-year increase of 23.3 percent, according to Inside Mortgage Finance. 

What’s more, many industry professionals expect this high volume of jumbo lending to continue this year, especially if interest rates for this product remain low. Jumbo rates have been decreasing steadily for the past several years, according to Fixed rates on 30-year private jumbo mortgages averaged 3.92 percent for the week ending this past Dec. 21, down from 4.61 percent in the same week in December 2011, and 5.58 percent in the same time frame in 2010.

In short, if you haven’t taken the plunge into the jumbo market yet, there may be no better time than now. Mortgage brokers and originators who are interested in this niche should consider the following four factors, all of which may prove to be especially favorable to the jumbo market.

QM’s minimized impact

Although it’s true that underwriting standards are much tighter for jumbo products than other types of loans, that doesn’t necessarily mean that the new qualified mortgage (QM) standards will further restrict the jumbo market. In fact, many fixed-rate jumbo underwriting guidelines already meet QM standards.

"When underwriting guidelines are properly followed, jumbo loans have a very low default risk." 

Generally, the jumbo products that could be affected by QM are the more exotic ones — for instance, interest-only loans, adjustable-rate loans, etc. Lack of investor demand, however, is making these kinds of products on both the jumbo and non-jumbo side archaic, so QM’s net effect even on these loan types likely will be minimal. In addition, when underwriting guidelines are properly followed, jumbo loans have a very low default risk. This is another reason why QM bodes well for the jumbo market, as under the QM standards, delinquent borrowers will face even greater challenges in placing blame on the lender for default when there is a demonstrable history of on-time payments.

Investor demand

Because of the industry’s tightened underwriting requirements, many investors currently are feeling confident about the long-term performance of jumbo loans. In addition, low interest rates and pent-up demand have further enhanced jumbo’s attractiveness to many investors.

The steady decline in overall interest rates over the past 24 months — down to around 3.5 percent for 30-year fixed mortgages at the end of this past year — is reason enough for some investors to jump on the jumbo bandwagon. In fact, the market’s current low rates have broadened the pool of qualified applicants, as many consumers may not have been able to qualify at the higher rates seen previously.

The proverbial cherry on top, however, is the fact that the gap between conforming rates and jumbo rates has been narrowing rapidly, making jumbo loans even more appealing to consumers from a purchase standpoint — and making them easier to refinance, as well.

Further, many lenders are jumping into the correspondent channel with an eye toward building their servicing portfolios, and these lenders often view jumbo loans as a solid long-term bet. Lenders like these are banking on interest rates increasing in the next few years, and when that happens, the revenues from retaining the servicing on those correspondent loans — jumbos in particular — will provide needed capital in a contracting market.

Lower risk

Because of the perceived higher risk of jumbo loans, underwriting remains tight, but that careful scrutiny actually reduces the overall risk in this niche. In fact, jumbo products are one of the few loan types for which many investors prefer to conduct their own underwriting, as they typically want an exact bead on the level of risk they’re undertaking. Considering that it takes a near-perfect borrower to qualify for a jumbo loan, this product is extremely attractive from a risk-mitigation standpoint.

As such, mortgage originators can sell these high-performing loans to investors without having to shoulder the underwriting liability. In other words, the jumbo market promises a high degree of ease for investors and originators alike.

Builder confidence

The U.S. Commerce Department reported a four-year high in the number of new permits issued for single-family home construction this past January, and the National Association of Realtors (NAR) has stated that housing starts must increase at least 50 percent from current levels to reverse the shortage of inventory. This past February, NAR also reported that home prices showed 12 straight months of year-over-year increases, with February’s prices increasing 11.6 year over year, the strongest gain since November 2005.

"Builder activity is up, and home prices are increasing. In turn, this likely means that builders will be more comfortable constructing more expensive homes."

Moreover, the U.S. Census Bureau has reported that 21 percent of homes sold this past February were priced at $400,000 and higher, and NAR states that as of this past November, sales of single-family homes priced at $1 million or more were up 52 percent from 2011. All of these numbers demonstrate two significant findings: Builder activity is up, and home prices are increasing. In turn, this likely means that builders will be more comfortable constructing more expensive homes, as they feel confident that these properties will sell.

•  •  •

The argument for pursuing jumbo loans essentially boils down to risk adversity. Market conditions have created an environment in which jumbo loans are one of the safest, most reliable and most affordable products available today. As many investors continue to clamor for jumbo loans, the brokers and originators who can fuel their need will find themselves with a wealth of business.


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