Who Wants My JUMBO Loan?
If you speak with almost any residential mortgage broker, they are aiming for two numbers: $417,000 and $625,500. These two numbers represent the upper limit caps for loan sizes that Fannie Mae and Freddie Mac have determined to be “eligible” and “acceptable” for “conforming, high balance conforming, and agency financing.” Once you reach the higher limit, you venture into another domain known as “non-conforming” or JUMBO financing. Given that 90% of all mortgages are now squeezed into conforming parameters, JUMBO loans, though lucrative for their size and commensurate commissions, are harder to close than conforming ones. In many cases, jumbo loans are harder to sell for the banks that originate them. Therefore, how should a borrower and their banking partner respond to this scenario? Let’s consider what is currently occurring in the marketplace.
By and large, most banks “churn and burn” mortgage paper, which means that they originate loans to earn income from the spread and associated fees, throw them into a pool of mortgages of similar characteristics, package them with an investment bank, and then sell to investors as mortgage backed securities. This process is similar to any other stock or bond. However, the paradigm has quickly shifted. In the past, nearly half of all JUMBOs were originated, sliced, diced, and sold to the investing public. Now, in the first half of 2014, not even 5% of JUMBOs were securitized. Amazingly, banks are starting to “hold their paper.”
With a cost of capital priced below 1%, banks are making a nice sized spread on loans that are relatively low risk. The math is easy–they charge 4.25% interest on the loan and pay .85% interest (if that), on an interest bearing checking account. They keep the 3.4% difference. Moreover, they are mining the loan applications of borrowers and cross selling services. One may ask– why securitize and just sell off, when you can hold and cross sell products such as checking accounts, money management services, controlled disbursements, credit cards, lines of credit, foreign exchange, and any other service that a banking institution could offer a client, particularly a wealthy one.
If banks aren’t squeezing loans to fit the Fannie/Freddie model, they are reviewing their own credit policy, which for the right borrower or situation can be quite flexible; especially if the chief credit officer has the authority to show latitudinal discretion on loans placed in the bank’s portfolio. But, the bank’s size does matter. All of the banks are getting into the “hold the JUMBO” game. Wells Fargo, BofA, and US Bank, are all in the process of increasing their private client services/wealth management divisions, and the JUMBO is a great way to mine for new prospects at a low cost. If the loan officer creates goodwill along the way, the transition into more products for the bank could be huge.
Regional and local players are jumping into the game as well. They may not have the capacity to offer large-scale private client services as many of the money center banks, but regional and local players have stepped up their game with regards to expanding services offered to business owners. Many regional and local banks have very effective small business departments and are more nimble (and preferred) for servicing the needs of an entrepreneur. With a JUMBO as a lead in, the product mix with a smaller bank will expand to lockbox, letters of credit, and other cash management, but with a small town touch, local flair and an expertise that a larger institution may not be able or wanting to provide. With that, you can see why even if the securitization market is not crying for JUMBO mortgages, there are others who are salivating to get a loan such as these on the books and aim for auxiliary sales.
So if you don’t fit within Fannie or Freddie’s black box of guidelines, don’t worry–you have options. Strong borrowers with good credit and great assets are valuable commodities to other institutions that aren’t looking for a “one-off” transaction, but instead are looking for a long-term relationship. It goes without saying that the JUMBO market is huge. The loan sizes are huge, as well as the incomes of the borrowers, but nowadays, so too are the alternatives available for closing the loan and servicing the borrower thereafter.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at email@example.com.