Published on November 14, 2014
Written by The Servion Group
Jumbo mortgages have long been a matter of debate for financial institutions trying to balance risk and revenue. Based on today's marketplace trends, that debate is unlikely to end anytime soon.
With the mortgage market moving away from refinances in favor of purchase mortgages, financial institutions across the country are in search of ways to boost their home loan portfolios in the face of greater competition.
This change has been in the cards for some time, as outlined by Freddie Mac's 2014: The Emerging Purchase Market report.
"We expect home sales to rise about 5 percent in 2014 from this year's level," Frank E. Nothaft, chief economist for the government-sponsored enterprise, stated in the report. "Add in home value gains, and a decline in all-cash purchases, and purchase-money lending may be up about 15 percent in 2014 compared with 2013. At the same time, the upward creep in fixed-rate mortgage rates and a dwindling pool of 'in-the-money' borrowers who could refinance will translate into a big drop in refinance originations in coming months. We expect the lending market to transition to one dominated by purchase-money in 2014, and even more so in 2015."
Jumbo mortgages represent one area where lenders can set themselves apart, helping to finance home purchases that go beyond the conforming loan limits of Fannie Mae and Freddie Mac. It's a strategy some financial institutions have already put into place, according to the Mortgage Bankers Association's Conference Survey Report & Scorecard from its annual conference in October.
Based on 26 surveys at the conference of executives across banks, mortgage companies, credit unions and other financial institutions, in a range of 0 to 40 percent, an average of 13 percent said their firm's activity includes jumbo mortgages. Meanwhile, when asked if their firm was putting jumbo mortgage into portfolios, eight said yes while 17 said no.
"[W]hile some organizations are turning to jumbo mortgages as a boost, even more continue to avoid them."
These numbers show that while some organizations are turning to jumbo mortgages as a boost, even more continue to avoid them. With stricter regulations in place regarding a lender's liability should a borrower not be able to repay their loan, it's easy to see why.
Risks associated with jumbo loans
Even before recent rules were put in place, jumbo loans have carried increased risks for financial institutions - just one reason why higher mortgage rates were typically a part of the bargain.
However, with new regulations under the Truth in Lending Act put in place by the Consumer Financial Protection Bureau, lenders have even more of a reason to be wary of nonconforming loans. Regulation Z states that financial institutions must make a good-faith determination regarding whether a borrower will realistically be able to repay a mortgage. With jumbo loans, the risk of default can be even greater, and lenders who have failed to properly verify a borrower's ability to repay could find themselves on the hook for lawsuits and other costs.
In short, jumbo loans represent both a risk and an opportunity. With so many financial institutions unwilling to dip into this particular sector, others can reap the rewards of reduced competition. However, in today's marketplace, it's more important than ever for lenders to weigh the risks before making a decision.