Jon and Jenny Clyman are eager to buy a new home near better schools in New York’s Westchester County before Oct. 1, when new limits on government-backed mortgages could force them into a more expensive jumbo loan.
“I look at it like a deadline because right now I can get more house for my money,” said Jon Clyman, a 37-year-old real estate broker whose wife is a controller at a bank. “I’m seizing the opportunity while it exists.”
The Peekskill, New York, couple may not need to rush. While jumbo mortgages used to buy pricier homes carry higher interest rates and require bigger down payments, the blow may be softened by banks seeking to expand their lending to affluent customers.
As competition picks up, lenders including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. are easing credit requirements and narrowing the gap on rates compared with government-backed loans. With deposits costing near zero and demand for commercial loans weak, banks and credit unions see an opportunity in high-end borrowers who haven’t suffered as badly as other Americans as foreclosures mount and unemployment hovers above 9 percent.
“We have shrunk our balance sheet over the last several years, not on purpose, but because we weren’t going to compete with the government,” said Monte Redman, who next month becomes chief executive officer of Astoria Financial Corp., a Lake Success, New York-based bank with $18 billion in assets that specializes in jumbo and apartment-building loans. “There are a lot more community banks like us that are going to be there to take up the slack.”
Fannie, Freddie Loans
The new limits, which will vary by locale, apply to loans backed by government-controlled Fannie Mae and Freddie Mac, the two largest mortgage-finance companies in the country, and the Federal Housing Administration. Together, they currently buy or guarantee about 90 percent of all mortgages. Starting in October, the maximum eligible loan will fall to $625,500 from $729,750.
Congress, seeking to resuscitate home sales as credit markets cratered in 2008, temporarily expanded the top loan amounts for U.S.-backing in the priciest residential areas, including New York, San Francisco, the Florida Keys and Washington. The cap for most of the country remained at $417,000. The Obama administration wants lawmakers to allow the expanded caps to be reset as an interim step in its efforts to cut the mortgage market’s dependence on government support.
“The argument to lower the limits is a lot stronger today than it was a year or two ago,” said Thomas Lawler, a former Fannie Mae economist who is now a Leesburg, Virginia-based housing consultant. “Jumbo loans aren’t that much more expensive than conforming loans today and the availability is greater.”
Small Loan Share
Another reason for optimism is that only a small percentage of loans may be affected by the changes.
About 5 percent, or $30 billion, of loans bought or guaranteed by Fannie Mae and Freddie Mac last year wouldn’t have qualified under the new, reduced caps, according to a March report by the Federal Housing Finance Agency. At the FHA, the amount would have been about 6 percent, or $14.2 billion, the Department of Housing and Urban Development said May 26.
Most affected by the cuts will be markets in California, Puerto Rico, the New York metropolitan area and Washington and its suburbs.
The biggest decline is set for Monterey County, California, where the cap will drop by $246,750 to $483,000. The smallest will be in Weld County, Colorado, where the limit will fall $500 to $417,000. In New York City and Washington, the largest qualifying loan will be $625,500, down $104,250.
Banks have the capital to own more jumbo mortgages, and some see an opportunity to bundle the loans into securities for sale to investors, so the impact of the new caps probably will be modest, said Cristian DeRitis, director of consumer credit analytics for Moody’s Analytics in West Chester Pennsylvania.
“But there is a downside risk because we’re forecasting here,” he said. “There is a possibility that banks don’t have the appetite and interest rates ratchet up quickly. And that could be disruptive to the market.”
Bank of America is considering dropping its down-payment requirement to as low as 15 percent for certain jumbo customers, from 20 percent, said Vijay Lala, product executive for first mortgages at the Charlotte, North Carolina-based bank’s home-loan unit. The company, the nation’s largest bank by assets, is “absolutely looking to put more on our balance sheet for the right customers,” he said.
Citigroup sees high-quality jumbo mortgages as “an important relationship product for our branch customers,” and as holdings that represent a good use of capital under pending international rules, according to Sanjiv Das, who runs the mortgage business for the New York-based bank.
Some companies are eager to get the market for packaging jumbo loans into bonds going again. After losses on mortgage securitizations fueled the worst financial crisis since the Great Depression, $534 million of home loans have been combined into bonds without government backing since mid-2008, down from a record of $1.2 trillion in both 2005 and 2006.
“We’d love to get 1 or 2 percent” of the more than $100 billion in estimated annual loan supply that would emerge if government limits eventually drop to $417,000 everywhere, said Randy Robertson, who is leading an effort by New York-based BlackRock Inc., the world’s largest money manager, to acquire jumbo mortgages through a $1 billion fund.
Private prime-jumbo mortgage originations, including refinancings, fell to $87 billion last year from a record $650 billion in 2003, according to newsletter Inside Mortgage Finance. They represented 7.7 percent, or $25 billion, of mortgages in the first quarter, while expanded-limit government loans were an additional 8 percent. Private prime-jumbos accounted for 18 percent of loans in 2005.
Rates for 30-year fixed private jumbo mortgages are 0.56 percentage point higher than typical loans, down from as much as 1.8 percentage points in 2009, according to data from North Palm Beach, Florida-based Bankrate.com. The difference averaged 0.26 percentage point in the five years through 2006. The average jumbo rate is 5 percent.
The spread on adjustable-rate mortgages, which averaged 0.16 percentage point through 2006, is even narrower because banks prefer ARMs to match their floating-rate liabilities. For loans that begin adjusting after five years, the gap has closed to 0.36 percentage point from more than 1 percentage point in 2008. The rate on the jumbo ARMs averages 3.34 percent.
Bigger Down Payments
“We love the jumbo market,” said Christopher Potter, a vice president at GuardHill Financial Corp., a New York-based mortgage brokerage. “The larger the loan size, the better the deal. It’s the same amount of work to do a $100,000 loan versus a $1 million loan.”
For high-end buyers, being shut out of FHA loans will mean losing the ability to put down as little as 3.5 percent, an option that requires paying insurance fees of 1 percent upfront and 1.15 percent a year.
Fannie Mae and Freddie Mac loans now offer expanded-limit borrowers the ability to put down as little as 10 percent with lower financing costs, if they take out a second loan or private mortgage insurance, according to Luke Hayden, president of the mortgage unit at Mount Laurel, New Jersey-based PHH Corp.
New Wells Guidelines
Wells Fargo, the nation’s largest home lender, introduced national guidelines in May for mortgages from $417,000 to $750,000, a range that now covers jumbos in some areas and may apply to them in others when the caps change, said Brad Blackwell, an executive vice president in its home-loan unit.
The bank is permitting down payments as low as 10 percent in many markets, he said, compared with at least 20 percent for loans of up to $1 million from most banks. The San Francisco-based bank is generally requiring borrowers to hold liquid assets equal to 10 percent to 20 percent of their loans, down from 20 percent to 40 percent at the peak of the credit crisis. Wells’s credit score minimum has fallen to 700 from 740, he said.
“While you’re still seeing some downward pressure on home prices, it’s our feeling that most of the declines are over,” Blackwell said. “The second factor is while the economy is recovering slowly, it is recovering.”
Borrowers may also face more “friction” while their applications await approval, as private mortgage buyers scrutinize lenders’ files more closely, said Hayden, whose unit is the country’s fifth-largest home lender. Second appraisals will become more common, he said.
Opposition From Realtors
Obstacles also remain for self-employed borrowers and high-earners dependent on bonuses, who now must thoroughly document their pay and its reliability, lenders say. Consumers also face down-payment requirements of 25 percent to 30 percent or more in markets most at risk for further price declines. Citigroup seeks additional cushions in places including Florida, Michigan and Nevada, according to Das, its mortgage chief.
The National Association of Realtors is fighting the new caps. The group will fly thousands of its members to Washington to lobby lawmakers during the first week of July, President Ron Phipps said in an interview.
“Maintaining high loan limits is critical to the market,” said Phipps, head of Phipps Realty in Warwick, Rhode Island. “We are working aggressively to extend them beyond Sept. 30.”
David Stevens, head of the Mortgage Bankers Association, said the “odds are low” that the limits will stay at their current levels.
The Clymans, the Peekskill house hunters, say they aren’t waiting to see if the Realtors are successful in preventing the rollback on loan limits. They recently made an offer on a home listed for $629,000 in nearby Yorktown, though they’re willing to pay as much as $729,000 for the right property.
“If we find houses we like, I’m going to let the offers fly to make something happen,” Jon Clyman said.