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Why Lenders Love the $2.5 Million Home Loan

It’s shaping up as the year of the mega mortgage.

Home loans from $1 million to $5 million were the fastest growing part of the jumbo market in January, according to purchase application data from the Mortgage Bankers Association. Wealthy borrowers are seeking even bigger loans this year while luxury housing prices rise and lenders lure them with competitive terms.

As first-time homebuyers struggle to qualify for mortgages in a market that’s shrinking after the housing collapse, lenders are providing more multi-million dollar loans to Americans who pose less risk. These borrowers are using the loans to purchase high-end homes in cities such as San Francisco and Miami, where prices have been climbing.

“We’ve seen strong appreciation in most of the coastal markets,” said Brad Blackwell, portfolio business manager at San Francisco-based Wells Fargo & Co., the biggest jumbo lender. “The price rise will move more homes into the category that would need a larger loan.”

An improving economy as well as a surging U.S. stock market, which rose to a record last week, is helping more borrowers afford the mega mortgages, said Lawrence Yun, the chief economist at the National Association of Realtors. The Standard & Poor’s 500 Index reached 2,110.30 on Feb. 20 and has increased 14 percent over the past 12 months.

In San Francisco, where the median home price is $984,500, technology companies in the region such as Apple Inc., Facebook Inc. and Google Inc. are driving the growth of employment and wages.

Prices Rise

Applications for mortgages from $1 million to $5 million to buy homes rose 16 percent in January from a year earlier, MBA data show. In January 2014, requests for home loans from $625,000 to $1 million comprised the fastest growing parts of the jumbo market.

Sales of homes worth $1 million and more will easily expand more than 10 percent this year, Yun said. High-end purchases have gained market share, with homes worth at least $1 million making up 2.2 percent of total sales in December compared with an average of 1.7 percent since January 2008, NAR said.

Wells Fargo

Jumbo mortgages, or those of more than $417,000 in most areas, exceed the limit for government-controlled Fannie Mae and Freddie Mac to guarantee. The loans are made to the most creditworthy borrowers and are generally held by banks instead of being packaged into securities and sold to investors. These borrowers usually have credit scores of at least 750, said Guy Cecala, publisher of industry newsletter Inside Mortgage Finance.

“What jumbo lending does for us is attract really high quality customers with high quality assets we can put on our balance sheet,” Wells Fargo’s Blackwell said.

Wells Fargo is the biggest jumbo lender, originating $42.3 billion in these mortgages last year, or 18 percent of the market, according to Inside Mortgage Finance. PHH Mortgage Corp. is No. 2 with $23.1 billion in volume, followed by JPMorgan Chase & Co. with $22.9 billion.

Mortgages of more than $1 million make up about 20 percent of Wells Fargo’s jumbo business, which is concentrated in the San Francisco Bay Area, New York City metro area and Los Angeles, Blackwell said.

Interest Rates

Lenders are courting wealthy borrowers by offering lower down payments and accepting assets in their bank accounts as collateral. Since banks keep the loans, they don’t pay guarantee fees to Fannie Mae and Freddie Mac and can offer low interest rates, said Joel Kan, director of economic forecasting at the MBA.

A Wells Fargo borrower who wants a mortgage of at least $1 million and puts 20 percent down may get a rate of about 3.88 percent, Blackwell said. The average rate for a 30-year fixed mortgage was 3.76 percent, Freddie Mac said in a statement last week.

Erin Lantz, vice president of mortgages at Zillow Inc., said banks pursue these borrowers in hopes of selling other products to them as well. The share of requests on Zillow Mortgages for loans from $1 million to $2 million increased to 13 percent in February from 10 percent a year earlier, the biggest increase among all jumbo segments, according to data from the Seattle-based firm.

“In the post-mortgage meltdown, larger banks are reevaluating the segments they want to get more aggressive on and the jumbo consumer is attractive not just as a mortgage client, but as a wealth management client,” Lantz said.

Lending Falls

The number of loans from $1 million to $10 million to buy homes in 100 of the largest metropolitan areas surged to 25,403 in 2014, the highest since 2007, according to property data firm CoreLogic.

After lenders raised credit standards following the 2008 financial crisis, many lower-income Americans have been shut out of the market. In January, applications for loans of less than $150,000 to purchase homes fell 12 percent compared with a year earlier, MBA data show.

Total mortgage lending, including refinancing, dropped 39 percent to $1.1 trillion in 2014, according to MBA. Jumbo originations declined 14 percent last year, the smallest drop among all mortgage products, according to Inside Mortgage Finance’s Cecala.

Good Spring

The bright spot for banks -- loans from $1 million to $5 million -- comprised 2 percent of the mortgage market in January. That business is poised to grow.

“We’re seeing more inventory,” Blackwell of Wells Fargo said about the luxury market. “It’s shaping up to be a pretty good spring.”

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