The unprecedented global pandemic has not only impacted much of our lives and lifestyles, it has also impacted the mortgage market, particularly on how they currently view the wealthiest mortgage borrowers. A recent Bloomberg article explains, “The wealthiest, most-reliable mortgage borrowers in the U.S. are hearing an unfamiliar word from lenders: No.”

 

What’s Happening

In a unique twist to the norm, the wealthiest and most reliable mortgage borrowers, normally the industry’s most valued customers are now being refused by lenders. The reason is simple: these borrowers take out loans known as jumbos because they’re bigger than most conventional mortgages. When they stop paying due to loss of income, the cost for lenders is magnified because the government doesn’t guarantee jumbo loans.

 

Jumbo Loans in a Nutshell

Jumbo loans exceed the limit set by the Federal Housing Finance Agency (FHFA), and are therefore not eligible to be purchased, guaranteed, or securitized. These loans typically finance luxury properties and homes in highly competitive local real estate markets, and lenders tend to charge more for jumbos compared to conventional mortgages.

 

Prior to the spread of COVID 19, jumbo loans were attractive to lenders. With most of the economy on a strange pause however, the availability of jumbo mortgages has plunged by 37% in March, more than double the drop in the overall home-loan market. Banks are also becoming concerned about home prices falling in markets that rely on jumbo mortgages to finance property purchases, such as New York, San Francisco and Seattle.

 

The Wells Fargo Example

Wells Fargo & Co. best illustrates how banks have begun to move away from jumbo loans. Wells produced $70 billion of jumbo mortgages last year, more than any lender in the country. In recent weeks, however, they have halted purchases from other mortgage banks and limited refinancings of jumbos to customers who currently have at least $250,00 parked at the bank.

 

Other banks are also following suit, including Truist Financial Corp. and Flagstar Bancorp Inc., limiting refinancings, suspending their purchases of new loans made by correspondent lenders or pulling short-term credit lines from smaller mortgage companies they fund that make jumbo loans. Whether the assets are good or not does not play a role in the decline of these loans, since much of the pullback is because investors who’d normally buy these loans no longer want them. It also doesn’t help that wealthy buyers are just as likely to stop paying mortgages as other borrowers, with approximately 5.5% of jumbo loans asking to postpone payments due to a loss of income, compared to 6% of all loans.

 

Jumbo Loans Still A Reality

Despite these hitches, jumbo financing hasn’t completely gone away, holding steady south of San Francisco in San Mateo County and with plenty of closed loans in Southern California. However, there is more difficulty in having them approved.

 

For more details and information, read the Bloomberg article here.