Americans are finding it pays to go big when borrowing to buy a home.
Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) lead banks that are offering jumbo mortgages, those too big for government programs, at rates at or below taxpayer-backed loans. On average, the extra cost of 30-year fixed jumbo loans reached a six-year low of 0.16 percentage point last month, according to data provider HSH.com. Bigger adjustable-rate mortgages with payments that can rise after five years ended last week 0.09 percentage point cheaper, the most since at least 1998.
While rates for conventional mortgages surged last month by the most in two decades, financing costs for million-dollar homes are becoming a relative bargain. Deposit-rich banks needing to make loans are suppressing rates to compete for wealthier customers as home prices soar in expensive areas from Manhattan to San Francisco.
“Lately, our jumbos are either in line with conforming or better,” said Karen Mayfield, the mortgage banking national sales manager at BNP Paribas SA’s San Francisco-based Bank of the West unit. “Slowly but surely, the gap has closed in the past six months, and it’s really become much more obvious in the market over the past 30 days.”
Jumbo mortgages are loans larger than those allowed in government-supported programs, currently as much as $729,750 for single-family properties in high-cost areas. For Fannie Mae (FNMA) and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments, the limits range from $417,000 to $625,500.
Bigger loans are getting relatively cheaper because they’re mostly put on bank balance sheets instead of packaged into securities that get sold to investors, according to Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia and former examiner with the Federal Reserve Bank of Philadelphia.
They’re seeking those loans because “there’s just not enough economic growth out there to create the other lending opportunities needed to support all the capital at these banks,” he said in a telephone interview.
Mike and Kelly Guarascio, who are buying a four-bedroom house in Stratham, New Hampshire for $570,000, locked in a 4.25 percent rate yesterday with Wells Fargo on a 30-year fixed mortgage that was about an eighth of a percentage point cheaper than Fannie Mae and Freddie Mac loans.
They initially considered using a larger down payment to get below the jumbo limit because they thought it might save them money.
That changed when Federal Reserve officials signaled last month they’re moving closer to reducing their debt buying designed to stimulate the economy, currently $85 billion a month, sending bond prices tumbling, and causing the biggest losses in government-backed mortgage securities since 1994.
Conventional fixed-rate borrowing costs soared to the highest since July 2011, with average rates for 30-year mortgages rising last week to 4.46 percent from 3.93 percent -- the biggest one-week jump since 1987, according to Freddie Mac surveys. The rate, which is up from 3.35 percent at the start of May, fell to 4.29 percent this week.
After the climb in rates, Jason Bonarrigo, a loan officer at Residential Mortgage Services Inc., suggested the Guarascios take the non-conforming option.
“When you look at monthly payments, every little bit helps,” Guarascio said. The savings “make us feel better. If you look over the course of a year, if you save $100 or so a month it is probably a nice vacation or something.”
Jumbo mortgage origination rose 15 percent to $54 billion in the first quarter from a year earlier, and is on pace to hit $220 billion in 2013, the most since 2007, according to newsletter Inside Mortgage Finance. New loans are still down from a peak of $650 billion a decade ago and were a fraction of the $433 billion in government-backed loans originated in the first quarter.
Banks are seeking to provide the loans after accumulating too much cash and bonds as a slow economy damped borrowing demand from consumers and companies and Americans sought the safety of bank accounts after pulling money from the stock market.
The difference between deposits at banks and their lending is at a record of almost $3.2 trillion, after averaging about $430 billion in the decade before the 2008 financial crisis, according to Federal Deposit Insurance Corp. data.
For the eight largest commercial banks, the ratio of loans to deposits, a measure of how they deploy customer funds with loans typically more profitable than securities, was at a five-year low of 84 percent at the end of 2012, down from 101 percent in 2007, according to Credit Suisse Group AG data.
Wells Fargo’s ratio stood at a 14-year low, or less than 84 percent at the end of March, according to data compiled by Bloomberg. Chief Executive Officer John Stumpf has said the lender would prefer the measure to be closer to 100 percent, and bolstered loan balances by retaining almost $23 billion of conforming mortgages in the three quarters ending in March. JPMorgan’s loan-to-deposit ratio was 61 percent.
Wells Fargo’s website on July 1 said it was offering 30 year fixed jumbo loans at 4.38 percent, lower than the 4.5 percent rate for conforming loans. The same day, an application on JPMorgan’s website estimated a rate of 4.38 percent for a fixed-rate loan to a New Jersey home buyer with excellent credit putting 30 percent down to buy a $1 million home, compared with 4.5 percent for a similar individual buying a $200,000 property. A seven-year jumbo adjustable rate mortgage, or ARM, was offered at 3.25 percent, compared with 4.75 percent for the other.
“It’s unusual to see jumbos priced below the conforming rate,” said Keith Gumbinger, vice president of Riverdale, New Jersey based HSH.com. “These are very valuable customers and also a very small group so competition for them can be intense.”
While JPMorgan doesn’t tie its jumbo-mortgage pricing to the amount of its other products used by a borrower, it likes the loans partly because of the relationships with affluent customers they can create or deepen, said Sean Kelley, the bank’s chief financial officer of mortgage originations.
“We don’t have operational capacity constraints today as far as jumbo is concerned,” he said in a telephone interview.
Vickee Adams, a Wells Fargo spokeswoman, declined to comment.
It’s especially unusual for fixed-rate jumbo loans to be cheaper than conventional loans. The extra cost peaked at as much as 1.8 percentage points higher in December 2008.
Wealthy borrowers are good candidates for adjustable-rate mortgages, which banks prefer because they can share the risk of rising rates with the homeowners, said Anthony B. Sanders, an economics professor at George Mason University in Fairfax, Virginia.
Banks have additional incentive to snag jumbo borrowers because rising rates are curbing opportunities to refinance their competitors’ mortgages. Refinancing applications tumbled 51 percent between a 2013 peak in May and the week ended June 28, according to data from the Mortgage Bankers Association.
At the same time, housing debt is looking like a safer bet, as delinquencies fall from record levels and after property prices started last year to recover following a five-year slump.
The median sale price of properties that fetched between $1 million and $5 million in the U.S. jumped 13 percent in April from a year earlier, more than twice the 5.1 percent increase for all homes, according to Zillow Inc. The San Francisco area topped gains in the S&P/Case-Shiller index of home prices in 20 major cities, with a 24 percent jump in April from a year earlier.
Tighter underwriting after the mortgage crisis, such as larger down payments, also mean new jumbo loans have been “performing beautifully well,” said Mark Zandi, chief economist for Moody’s Analytics Inc.
Bank appetite for jumbo mortgages contrasts with upheaval in the market for securities without government backing created out of the loans. Investors have been demanding higher yields as the Fed’s potential tapering raises concern that the debt will remain outstanding for longer than projected and prices on competing risky assets have plunged.
Redwood Trust Inc. (RWT), the most-active issuer, sold top-rated bonds at yields over benchmark rates of 2.21 percentage points on June 11, compared with 1.75 percentage points in April and as low as 0.97 percentage point in January. Mortgage-bond pioneer Lewis Ranieri’s Shellpoint Partners LLC sold some similar top-rated bonds on June 27 at spreads of 3.3 percentage points and had to restructure parts of the deal to offer investors more protection against homeowner defaults.
Companies such as Redwood that rely on packaging jumbo mortgages into securities, known as aggregators or conduits, have been forced to increase their rates as debt investors demand wider spreads, according to Michael McMahon, a managing director at the Mill Valley, California-based firm.
“It makes the jumbo rate offered by aggregators relatively unattractive compared with the jumbo rate offered by banks,” he said in a telephone interview. “It would appear that banks have a different view on interest rates” than bond investors.
Redwood (RWT) has slumped 25 percent since the end of March, including reinvested dividends, paring its gain this year to 4.7 percent.
The gap between rates on traditional and jumbo loans has also narrowed after Fannie Mae and Freddie Mac increased how much they charge to insure bonds, according to Bank of the West’s Mayfield. Their regulator has been seeking to make private capital more competitive after taxpayers were forced to bail out the government-chartered companies in 2008.
Fannie Mae charged 54.4 basis points for its new guarantees on single-family debt in the first quarter, up from 28.9 a year earlier, according to the Washington-based company.
Banks have plenty more capacity for home loans. While they’ve added $46 billion of 1-to-4 family residential loans to their balance sheets since their portfolios of the mortgages reached a seven-year low amid borrower defaults in 2011, the lenders’ $1.88 trillion of holdings on March 31 were down from a peak of $2.24 trillion at the end of 2007, according to FDIC data.
“The banks are awash in liquidity, and they are looking for ways to make good loans,” said David Hilder, an analyst at Drexel Hamilton LLC in New York, who recommends buying Wells Fargo and JPMorgan stock. “One should not leap to the conclusion that this is uneconomic on the part of Wells Fargo and JPMorgan. In my experience they have very sharp pencils in terms of their cost of funds and their credit requirements.”
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