Signs of Life in Jumbo Lending

Big Banks Once Again Competing with Credit Unions, Community Banks Jumbo lending is staging a comeback of sorts, with major lenders once again buying the oversize mortgages from other lenders or allowing independent mortgage brokers to originate loans for them.

Bank of America and Wells Fargo had already been battling each other for market share in jumbo lending this year, with BofA announcing in March it was cutting rates to make more of the loans, which are too big for purchase or guarantee by Fannie Mae and Freddie Mac.

Now JPMorgan Chase & Co. has resumed buying jumbo loans made by other œcorrespondent lenders, and Citigroup is offering jumbo loans through mortgage brokers, Bloomberg reports.

Those practices, common during the housing boom, all but vanished when the secondary market for loans not backed by Fannie, Freddie and Ginnie Mae withered in August and September 2007.

œThe whole market has improved in the last 90 days, said Terry Erwin, chief lending officer for KeyPoint Credit Union, a jumbo lender.

The lack of a secondary market has meant that lenders have to keep the jumbo loans they make on their book as investments. That can create capital constraints that limit lenders™ ability to make new loans.

Credit unions and community banks that are able to make jumbo loans against their customers™ deposits have reportedly been doing more business in many markets. Lenders that aren™t selling loans to Fannie Mae and Freddie Mac don™t have to deal with new rules for appraisals that real estate trade groups say are derailing sales.

But many jumbo borrowers are still paying higher interest rates and facing tougher underwriting standards on the loans than in the past.

Although jumbo loans have remained available to borrowers with good credit making sizable down payments, rates for jumbo loans have been 1 percent to 1.5 percent higher than conforming loans, and many lenders are expecting FICO scores in the 700s.

To address the potential liquidity shortage, lawmakers last year allowed Fannie, Freddie and the Federal Housing Administration to guarantee loans of up to $729,750 in high-cost housing markets.

The upper loan limit, which had previously been set at $417,000 for Fannie and Freddie, was briefly rolled back to $625,500 on Jan. 1 amid false expectations that the secondary market for jumbo loans would make a comeback. The limit has since been restored to $729,750.

Although so-called œsuper conforming loans between $417,000 and $729,750 are cheaper than jumbo loans that can™t be securitized and sold to secondary market investors, Fannie and Freddie have imposed additional conditions on them.

The guidelines published by Fannie and Freddie in March and April generally require that borrowers have FICO scores of at least 700 and provide at least a 10 percent down payment. Freddie Mac requires down payments of at least 20 percent for loans above $625,500.

Super-conforming loans backed by the Federal Housing Administration allow borrowers to make down payments of as little as 3.5 percent. The trade-off is that those borrowers will pay additional mortgage insurance premiums that are based on the size of the loan.

With Fannie, Freddie and Ginnie Mae helping provide liquidity in the super-conforming jumbo market, sales of high-end homes in high-priced markets picked up in May (Ginnie Mae guarantees payments on mortgage-backed securities backed by the Federal Housing Administration).

Turning to credit unions

Jumbo lending never went away, but when the big banks tightened their standards and increased their jumbo rates, many buyers (and agents) didn™t know where to go to get the money to finance these purchases.  Credit unions are a good alternative to major banks for jumbo loans and even when jumbo rates were astronomical, these groups were offering rates that were close to jumbo conforming.

Although borrowing from a credit union means becoming a member, the rules for joining have been relaxed to the point where merely living or working in a credit union™s service area is enough to establish eligibility.

There is a big difference dealing with a bank that has to report to stockholders and a credit union that is a not-for-profit. You can go in with a common-sense loan and they get a deal done!

Traditionally, many borrowers have considered credit unions primarily as a place to refinance their mortgages. Now, we™re starting to see these organizations originating more purchase loans.

Most credit unions will make jumbo loans of up to $1 million with as little as 20 percent down, and loans of up to $1.5 million with 25 percent down. But, the average down payment is more like 30 to 35 percent, and the unions want to see FICO scores of 700, instead of the 680 that was the norm in better days.

Those high standards are one reason credit unions can still make jumbo loans today.

According to the National Credit Union Administration, the nation’s roughly 5,000 federally charted credit unions hold $442.4 billion in assets, and another 3,000 state-charted credit unions hold $360 billion in assets. NCUA estimates that loan volume at federally charted credit unions grew 7.7 percent from 2007 to 2008, to $528.6 billion, with a 14.5 percent increase in first mortgage and real estate loan and lines of credit.    

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