Jumbo mortgage rates are near record lows, but there’s a catch for borrowers looking for home loans above the amount Fannie Mae and Freddie Mac will guarantee: It hasn’t been this tough to get a jumbo in four years.
Jumbo lenders like Chase and Wells Fargo beefed-up their standards when the economy began crumbling in mid-March and some stopped funding the home loans that exceed the amount the government will back, usually those above $510,400.
That currently leaves smaller players in the market like Sprout and Luxury Mortgage, and some portfolio lenders like Union Bank in West Coast states, though they typically are only lending to borrowers who meet stricter standards, like having extra cash reserves on hand, said Mark Goldman, a loan officer with C2 Financial.
“There’s a lot more risk for lenders when it comes to jumbo mortgages,” said Goldman. “If you have a $300,000 loan go bad on you, that’s a terrible thing, but if you have a $600,000 mortgage go into default, that’s twice as bad.”
A Mortgage Bankers Association index that measures credit availability for jumbo mortgages fell 54% from February, when the COVID-19 pandemic first started hitting the U.S. The index level in May showed the tightest jumbo credit conditions since March of 2016, according to the MBA data.
Goldman said when he was looking for a rate quote for a jumbo loan applicant in the time before the COVID-19 pandemic, he typically would get responses from as many as 46 lenders. Now, he’s lucky to get a handful.
“It’s down to between zero and five,” Goldman said.
The spike in forbearances due to pandemic-related job losses is the main reason for the jumbo pull-back, Goldman said.
“When the forbearances started mounting the mortgage market began shutting down, and a lot of the biggest players like Chase suspended operations,” he said. “As we see the number of forbearances go down slowly, and there’s a lot more people who can make their payments, the availability of jumbo mortgages is slowly returning to the market.”
The share of private loans in forbearance, either jumbo loans or mortgages packaged into private-label securities, is 9.5% this week, matching the prior week, according to Black Knight. That’s down from 9.6% in the first week of June, according to the data.
The jumbo forbearance rate is better than the combined rate of loans backed by the Federal Housing Administration and the Veterans Administration: 12.1%.
However, it’s not as low as the rate for loans backed by Fannie Mae and Freddie Mac. The rate for so-called conforming mortgages is 6.8% this week, down from 7% last week, Black Knight said.
Sprout was among several companies that froze their jumbo funding activities in March, but by May the company was lending again. On Tuesday, Sprout announced several new programs including an increase in loan-to-value, the ratio that measures the mortgage amount against the property value.
Before the pandemic, lenders were eager to fund loans for jumbo borrowers, who typically had the best credit scores and the most equity in their properties. They also viewed them as good bets for cross-selling other financial products.
After 40 million people lost jobs because of the pandemic, they looked less alluring because the government wasn’t standing behind the loans.
For those who can qualify, the jumbo rates are tantalizingly low. The average rate for a jumbo mortgage fell to 3.66% in May’s last week, close to the 3.58% in March that was the lowest in an MBA data series that goes back to January 2015. In the first week of June, the jumbo average was 3.7%.
In a flip, the jumbo averages are not as low as conforming loans. In the five years before COVID-19 hit the U.S., there were only about a dozen times when the average rate for a conforming loan was lower than the average jumbo rate in MBA’s series of weekly data. And, when that did happen, the difference was typically just a few basis points.
The pandemic changed that. Every week since mid-February, the average rate for jumbo loans has been above the conforming average – and not by a few basis points.
In the last 10 weeks, the difference has averaged 31 basis points. In other words, the average rate for jumbos has been almost a third of a percentage point above the average rate for conforming mortgages.
“A lot of that is the forbearance situation,” said Chris Low, chief economist of FHN Financial.
When Mark Calabria, the director of the Federal Housing Finance Agency, came out and said servicers would only have to pay four months for GSE loans in forbearance, it reassured lenders, he said.
“With a GSE-qualifying loan, the mortgage servicer is on the hook for the first four months, because the bondholders still need to get paid whether the mortgage borrower is paying or not, and after that the government pays,” Low said.
“With the jumbo, you’re potentially on the hook for the whole year of forbearance, after which you find out whether the borrower is going to default,” he said.
