2013: Luxury Lending Made Easy
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A housing-market upturn means lenders are luring some upscale home buyers with tempting deals on mortgages
For much of the year, lenders have been courting affluent home buyers with enticing terms on private jumbo mortgages, which exceed $417,000 in most parts of the country and are larger than $625,500 in pricier housing markets, like New York and San Francisco. They have been discounting mortgage rates and closing costs, lowering down payment requirements and loosening the lending requirements for some. In addition, several large lenders have been negotiating one-off deals with clients who are adamant about getting a better deal—read: lower rate—than what the banks are publicly offering.
Private jumbo-mortgage originations are now on pace to hit the highest level since 2007, before the downturn kicked in. Borrowers signed up for $216 billion of private jumbos year to date through Sept. 30, up 34% over the same period a year ago, according to new data from Inside Mortgage Finance, a trade publication.
Some lenders say they have seen a bigger jump in jumbos. Bank of America BAC +0.84% Bank of America Corp. U.S.: NYSE $15.56 +0.13 +0.84% Dec. 6, 2013 4:00 pm Volume (Delayed 15m) : 91.36M AFTER HOURS $15.60 +0.04 +0.26% Dec. 6, 2013 7:59 pm Volume (Delayed 15m): 841,754 P/E Ratio 23.22 Market Cap $165.96 Billion Dividend Yield 0.26% Rev. per Employee $378,682 12/06/13 Bank of America Added to Los A… 12/06/13 Court Approves $500 Million Cl… 12/05/13 Court Weighs Penalty in Bank o… More quote details and news » BAC in
Your Value Your Change Short position says it funded roughly $19 billion in jumbo mortgages during the first three quarters, up 44% from the same period a year ago. The Bank of New York BK +1.48% Bank of New York Mellon Corp. U.S.: NYSE $33.62 +0.49 +1.48% Dec. 6, 2013 4:00 pm Volume (Delayed 15m) : 3.70M AFTER HOURS $33.55 -0.07 -0.21% Dec. 6, 2013 4:42 pm Volume (Delayed 15m): 65,437 P/E Ratio 18.27 Market Cap $38.61 Billion Dividend Yield 1.78% Rev. per Employee $302,283 11/20/13 Small Firms Try to Fill Advise… 09/27/13 Foreign Lenders Eye Hong Kong’… 09/17/13 Paris to New York, Via Hong Ko… More quote details and news » BK in
Several factors are fueling the return of jumbo lending, including rising home prices and a drop-off in refinancing activity. The number of applications submitted to lenders for refinancing has plummeted 69% since it hit a peak in May, according to the Mortgage Bankers Association. To fill the void, lenders are increasingly giving private jumbo mortgages to wealthy home buyers. During the third quarter, jumbos were the only home loans where the total dollar amount of originations increased year-over-year, according to Inside Mortgage Finance. Lenders say wealthy borrowers present little risk of defaulting because they can dip into their assets in case of a sudden job loss.
To lure borrowers, lenders have started easing requirements. In July, Wells Fargo WFC +1.99% Wells Fargo & Co. U.S.: NYSE $44.11 +0.86 +1.99% Dec. 6, 2013 4:01 pm Volume (Delayed 15m) : 16.53M AFTER HOURS $44.10 -0.01 -0.02% Dec. 6, 2013 7:45 pm Volume (Delayed 15m): 385,380 P/E Ratio 11.46 Market Cap $227.82 Billion Dividend Yield 2.72% Rev. per Employee $332,281 12/06/13 Google Glass Half-Empty for We… 12/06/13 Los Angeles Sues Wells, 12/04/13 U.S. Banks Again Fail to Compl… More quote details and news » WFC in Your Value Your Change Short position lowered its minimum down-payment requirement for jumbos to 15% from 20%. In October, Bank of America made the same move for mortgages of up to $1 million.
They are also making it easier for wealthy buyers to qualify. J.P. Morgan Chase JPM +0.43% JPMorgan Chase & Co. U.S.: NYSE $56.06 +0.24 +0.43% Dec. 6, 2013 4:00 pm Volume (Delayed 15m) : 18.45M AFTER HOURS $56.06 0.00 0.00% Dec. 6, 2013 6:16 pm Volume (Delayed 15m): 208,612 P/E Ratio 12.60 Market Cap $209.84 Billion Dividend Yield 2.71% Rev. per Employee $431,637 12/06/13 J.P. Morgan Is in Talks With U… 12/05/13 J.P. Morgan to Warn Customers … 12/05/13 Citigroup, Morgan Stanley down… More quote details and news » JPM in
Your Value Your Change Short position allows lower FICO scores and lower down payments for jumbo applicants than for customers seeking smaller-size mortgages. Separately, this year Wells Fargo created a team of underwriters who specialize in jumbo lending, which considers applicants who may have larger than normal debt-to-income ratios or lack traditional income documentation. The team looks at their total financial picture and uses “judgment when underwriting customers rather than a rules-based approach,” says Brad Blackwell, portfolio business manager for Wells Fargo’s home-mortgage unit.
Experts say borrowers are turning to jumbos largely because of the deals. This was the first year in at least three decades that private jumbo rates were cheaper than regular-sized mortgages. And in some cases, affluent borrowers who have significant assets with a bank can qualify for discounts that aren’t available to others. For example, individuals with at least $250,000 in deposit, retirement or brokerage accounts at Bank of America or Merrill Lynch can get a half a percentage-point discount on points (optional fees borrowers can pay upfront to get a lower interest rate) paid toward their mortgage.
Discounts don’t stop there. Several banks say they are now open to negotiating mortgage rates with applicants. Bank of America says it makes pricing exceptions in certain cases to be competitive and provide pricing flexibility. Citi says it will match a competitor’s offer shown in a good-faith estimate—the form that provides borrowers with the terms of their mortgage and estimated costs—as long as the pricing compares rates, fees and points.
The discounts help borrowers in several ways. Besides paying less in interest, borrowers can engage in arbitrage: Rather than paying all cash and locking those funds into a home, they’re signing up for mortgages with rates that are lower than the returns they can earn by putting that cash to work in other investments.
To be sure, borrowers should consider the pitfalls that can accompany these incentives. That can include buying a more expensive home just because cheap financing is available—a strategy used by many during the housing boom who ended up foreclosing. Also, many borrowers are paying all cash so that they can close on the home quicker and avoid headaches like a lower-than-expected appraisal that derails financing and ultimately the sale.
Here are a few more issues to consider.
• Tax benefits. Borrowers can usually deduct interest payments on a total of up to $1 million of mortgage debt.
• Rate comparisons. When shopping around, borrowers should make sure the rates the are getting from every lender either have no points or the same number of points attached to them.
• A home’s location. Some lenders reserve their best offers for homes in strong real-estate markets. Affluent borrowers who want to buy in markets that are still recovering may not be able to tap into every deal.