The Growing Jumbo Mortgage Market
The story of the jumbo mortgage loan market today seems to be one of expansion. The variety of homes bought with nonconforming mortgages is expanding, as is the group of homebuyers purchasing jumbo loans. Lenders are working hard to woo more jumbo loan customers, and the market is increasing regarding market share.
So, what does this story mean for the real estate industry and homebuyers? Today, we’ll take a deeper look at where the market stands, and where it’s headed.
What’s a Jumbo Loan, Again?
Jumbo loans, or nonconforming loans, are those that exceed the conforming loan limits of government-backed loans from Fannie Mae or Freddie Mac. Those limits, set by the Office of Federal Housing Enterprise Oversight at the Federal Housing Finance Agency, vary widely across the country, from $417,000 to $625,500.
While in most places homebuyers are still restricted to government-backed loan for less than $417,000, in so-called high-priced areas, that limit rises all the way up to $625,500. That brings us to our first story of the jumbo market expansion.
Conforming Loan Limits and Listing Prices Inch Up
While conforming loan limits were raised for some hotter markets in November 2015, as was expected, the FHFA decided not to lift the lower limit of $417,000. The reason was that home prices nationally haven’t yet surpassed pre-decline levels of 2007.
However, that’s not the case in a number of tight housing markets and economically strong metros. Far from preventing the need for jumbo loans in places like Denver, Boston, Seattle, and San Diego — which all saw their conforming loan limits rise for 2016 — conforming loan limit increases are working to keep up with rising property values.
As we noted last year, a Zillow study found the number of homes with price points that require a jumbo mortgage loan and 25-percent down payment increased 13 percent for the top 25 markets over the last four years.
In fact, jumbo loans aren’t just confined to markets like Manhattan or San Francisco. The same report found jumbo loan listings to be up in markets as diverse as Portland, Ore., Denver, and Detroit. In Portland, the number of homes that would require a jumbo loan nearly doubled from 2012 to 2015 to eight percent of listings. Denver also saw an 82.3 percent increase in the number of jumbo listings over the same period, despite that its conforming limit is higher. Even Detroit saw a 108-percent increase in the number of jumbo listings, which comprise 1.9 percent of the market, over the same period, pushed up by a customer base of auto executives and small business owners.
Meanwhile, the story for jumbo loan lending is also expanding. Pushed by demand from customers, increasing real estate values, and competition from other lenders, major mortgage lenders are easing their standards for nonconforming mortgages.
Wells Fargo was one of the first major lenders to take this step, with others soon following. In 2014, Wells Fargo dropped its FICO credit score requirements for jumbo loan borrowers from 720 to 700.
In August of 2015, JPMorgan Chase followed suit, saying it would accept applicants with as little as 15 percent down and scores of 680. Previously, the lender had required jumbo loan borrowers to meet a score of 740 and pay 20 percent or more down. Following the JPMorgan Chase announcement, Wells Fargo noted it would also accept scores of 680 on a case-by-case basis.
Another part of the lending story is the diversification of the jumbo lender market. Beyond traditional lenders, credit unions and online lenders, including Quicken Loans, Movement Mortgage, and Social Finance (SoFi), are capturing more of the jumbo mortgage market.
It was an online lender, Quicken Loans, which displaced Bank of America in Inside Mortgage Finance’s 2014 list of top mortgage lenders. SoFi used its valuation of $4 billion to finance $1.9 billion of mortgage loans in 2014, with an average jumbo loan value of $900,000. Online lender Movement Mortgage is also luring jumbo loan customers with straightforward processes and the promise of quick closings.
Even credit unions are expanding their footprint in the jumbo market. In December, San Francisco Federal Credit Union unveiled its new zero-down jumbo mortgage for loans of up to $2 million.
What’s Ahead for the Jumbo Mortgage Market
As for the direction things are headed in, the Wall Street Journal seemed optimistic last month that the jumbo loan market would continue to move in a positive direction.
“Unless the bottom falls out of the economy, jumbo lenders predict continued demand,” wrote the paper, citing Guy Cecala, CEO and publisher of Inside Mortgage Finance. The Journal noted regional lenders and nonbank lenders were able to take part in the jumbo market thanks to the enthusiasm of larger lenders to buy and hold the loans in their portfolios.
In fact, it was another strong year for jumbo loans, with $320 billion in jumbo loans financed in 2015. Jumbo loans reportedly accounted for 19 percent of all mortgage lending, an uptick from 18 percent in 2014.
Lastly, the Journal notes that jumbo interest rates are likely to remain favorable for borrowers this year, encouraging more jumbo loans. Keith Gumbinger, vice president of HSH.com, a mortgage rate website, told the paper rates could stay below four percent for a while longer and predicted it was unlikely for 30-year fixed-rate loans for jumbo mortgages to top 4.625 percent by the end of the year.
All in all, that’s good news for mortgage lenders and real estate professionals working in the jumbo marketplace, as well as for homeowners looking to buy a jumbo-priced home this year.