Todd Vitale, a personal trainer who opened his own gym last year, said he was having difficulty getting a mortgage of more than $700,000 to buy a home in Greenwich, Connecticut, because his new business was untested.
Vitale then tried Wells Fargo & Co., the biggest U.S. home lender, where he kept most of his savings in an account he opened more than a decade ago, he said. He worked with the bank’s private mortgage unit, whose clients are entitled to loans of up to $6 million and personalized service, and had the opportunity to explain that he had already run a similar business and could make the gym succeed. Wells Fargo approved his 30-year fixed-rate mortgage of more than $700,000, he said.
“I don’t think I would have gotten a loan unless Wells Fargo private mortgage gave me a shot,” said Vitale, 38, who moved in to his new 3,000 square-foot home in February. “I would have had to walk away from the home.”
Jumbos, or loans of at least $417,000 in most areas, are one of the few thriving pieces of an otherwise shrinking mortgage market. The biggest banks, including San Francisco-based Wells Fargo, JPMorgan Chase & Co. and Bank of America Corp., are ratcheting up efforts to win wealthier borrowers while keeping credit tight for almost everyone else. Lenders are allowing assets in accounts to serve as collateral in lieu of down payments, cutting rates if customers have or set up investment accounts, rolling out new adjustable-rate jumbo mortgages, and accepting lower down payments.
“Jumbos are growing while almost everything else is dead,” said Paul Miller, a banking analyst at FBR Capital Markets Corp. based in Arlington, Virginia. “Big banks need loan growth. If they were getting decent commercial loan growth, they wouldn’t be so aggressive on competing for jumbos.”
Applications for jumbo mortgages of at least $729,000 increased 4.9 percent in March from a year earlier, while requests for loans of less than $150,000 fell by 21 percent, according to the Mortgage Bankers Association. The average purchase application loan amount reached $280,500 in the week ended April 18, the highest since the survey started in January 1990, the MBA said.
Jumbos, also called non-conforming loans because they exceed the limit for government-backed Fannie Mae and Freddie Mac to guarantee, are loans of more than $625,500 in pricier markets such as Manhattan and Los Angeles. They’re generally made to the most creditworthy borrowers with FICO scores of 760 on average and held by banks instead of being packaged into securities and sold to investors.
Plunging mortgage lending at Wells Fargo and JPMorgan, the second-largest U.S. mortgage lender, dragged down their first-quarter earnings. Both banks are paring staff, with New York-based JPMorgan reducing the number of jobs at its mortgage unit by 30 percent, or 14,000 positions, since the start of last year. Wells Fargo got rid of 1,100 jobs in its residential mortgage business in the first quarter to keep expenses in line with demand for loans. Bank of America, the fourth-largest mortgage lender, swung to a surprise loss in the first quarter on costs tied to mortgage disputes.
Refinancing, which drove lenders’ profits last year, fell in the week ended April 25 to the lowest level since 2008, according to the MBA, after increases in borrowing rates. While the average rate for a 30-year fixed mortgage declined to 4.21 percent this week, it’s still up almost a full percentage point from a near-record low last May, data from Freddie Mac show.
“That level of drop sends everyone everywhere looking for business,” said Joel Kan, director of economic forecasting at Washington-based MBA.
Lenders are also vying for jumbos since they don’t have to pay higher guarantee fees charged by Fannie Mae and Freddie Mac to insure the bonds, as they do with conforming loans, said Richard Lepre, an Alamo, California-based loan officer with RPM Mortgage. That means they can charge lower rates on jumbos, making them more attractive than traditional loans.
The rate at Wells Fargo for a 30-year fixed jumbo mortgage was 4.13 percent as of yesterday, compared with 4.25 percent for a conventional 30-year fixed loan.
JPMorgan modified its guidelines in the third quarter for making jumbo loans to take into account a client’s total assets at the bank. The bank made the change after seeing that customers who had long-term relationships with JPMorgan were less likely to default on their loans.
The lender created a separate process last year to review all declined loans to ensure those decisions made sense. It also set up a group that works with wealthy clients who have more complex financial situations, such as self-employed borrowers.
“We leverage relationships to let the customers know we really want to do business with them,” said Lesley Corydon, a senior vice president in the private client mortgage group at JPMorgan.
JPMorgan’s jumbo mortgage originations represented 21 percent of its total originations in the first quarter of 2014 compared with 10 percent a year earlier, according to the bank.
Customers of Chase Private Client, who have assets ranging from about $500,000 to $5 million in total wealth, increasingly are opting to use their deposits and investments as collateral when borrowing. Some clients use the credit as bridge loans or to make larger down payments.
Vitale, the trainer who works with high school and college athletes at his Division 1 Prep gym, said he considered going to a non-bank, such as a hedge fund, for his home loan. He said he was dissuaded by the high rates and hoops he would have had to jump through to get the loan, compared with getting his Wells Fargo mortgage.
“We are pleased to know that Mr. Vitale received assistance with his home lending needs,” said Emmanuel Vuillequez, product manager for non-conforming mortgages at Wells Fargo.
Last year, Wells Fargo created a team of 400 underwriters spread across six U.S. locations who just focus on jumbo loans. The bank is trying to win more jumbo business through better execution, deploying specially trained underwriters who can handle complicated deals and complete them by the closing date, Vuillequez said.
“Jumbo lenders are looking for ways to distinguish themselves from other jumbo lenders,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication in Bethesda, Maryland. “Jumbo lending was the bright star of the mortgage market last year, so everyone is looking to ride that momentum into 2014.”
At Bank of New York Mellon Corp., where the average size of a mortgage is $1 million, clients can get 100 percent financing. They don’t have to put any money down and can instead pledge assets in investment accounts as collateral, said Bill Sappington, head of private banking at the New York-based firm.
BNY Mellon earlier this year started offering customers the option to lock in mortgage rates for 90 days, instead of the typical 30-day term. The additional days give them more time to close knowing the rate is secure.
Bank of America in October reduced the down payment to 15 percent from 20 percent for most jumbos of less than $1 million. Existing customers at the bank may receive discounts on their mortgages based on their level of business with the firm, said Susan Atran, a Bank of America spokeswoman.
At the Charlotte, North Carolina-based bank, nonconforming mortgage originations were 37 percent of overall loans made during the first quarter compared with 22 percent a year earlier, according to the firm.
RPM Mortgage this year began offering new jumbo adjustable-rate mortgages with initial low rates. One of their loan products provides a fixed rate for five years at a maximum of 2.63 percent, and then resets once during the next five years to no more than 4.63 percent, Lepre said.
Jumbo originations are still lower than they were before the financial crisis. A decade ago, jumbo ARMs helped fuel the housing bubble by letting buyers qualify for homes they could only afford at the low rates before they reset.
When home prices stopped climbing in mid-2006, both jumbo and conventional ARM borrowers began defaulting in higher numbers, contributing to the collapse of the mortgage market that in turn led to the most severe financial crisis in decades.
Today, demand for jumbos is growing as borrowers resume buying second homes or investment properties, according to Chase’s Corydon. Banks are often fighting for loans in the $1 million to $2 million range, said Mike McPartland, head of lending for Citigroup Inc.’s private bank in North America.
“If in the past, I was competing with two private banks, now it feels like I’m competing with two private banks and two regional lenders for that $2 million mortgage,” said McPartland, whose clients generally have at least $25 million in net worth. “The benefit to working with a bank that knows you is we don’t treat a mortgage like an isolated financial transaction.”