Big Banks Aggressive in the Jumbo Mortgage Market
By: Vanessa Rodriguez
August 10, 2010 (FreeRateUpdate.com) – What do you get when you couple super-low interest rates with stifling government regulation? Big banks would respond: Opportunity. As President Obama dissolves risky financial institutions and Fannie and Freddie stiffen up lending standards, the big players change up their game plans and target a new, but familiar, market segment of jumbo loans.
Due to their to their marked riskiness and immediately following the sub-prime market bust in 2007, interest rates on jumbo mortgage loans were much higher than those of conforming loans insured by the Federal Housing Administration. Jumbo loans do not meet the criteria for conforming loans as set by Fannie Mae and Freddie Mac. Therefore, these non-conforming loans are uninsurable by the FHA. Lenders all-but refused to lend to jumbo loan borrowers and to qualify for jumbo loans was nearly impossible. The national conforming loan limit is $417,000 in the continental U.S. and $625,500 in Alaska, Hawaii, Guam and the US Virgin Islands. However, jumbo loan amounts are limitless. As of this writing, the interest rate on 30 year fixed rate conforming loans is 4.250% and 5.125% on jumbo loans.
Last month, President Obama signed into law financial reform legislation, the Dodd-Frank bill, which increases regulatory practices. The new legislation permits the Federal Deposit Insurance Corporation (FDIC) to dismantle any financial institutions deemed “systemically risky,” forces banks to increase capital reserves, and enforces these regulations via a new consumer financial protection bureau. President Obama commented that this new legislation is “…the toughest financial reform since the ones we created in the aftermath of the Great Depression.”
In addition to the new legislation, the upfront mortgage insurance premium on FHA-insured loans has increased from 1.75% of the total loan amount to 2.25% of the total loan amount. The increase in mortgage insurance premiums aims to increase capital reserves, which last year’s audit revealed that the Federal Housing Administration fell short of the capital reserve requirement by 1.5%. Capital reserves slipped to a dangerous, all-time low due to the exuberant number of loans insured by the FHA. FHA Commissioner, David Stevens, reported that FHA insured loans have an unhealthy market share of more than twenty five percent. Banks seek to gain market share by targeting a different segment of the market, namely the jumbo mortgage loan market and high-end housing.
Several big banks, such as J.P. Morgan Chase, Citibank, Bank of America, and Wells Fargo, are taking advantage of super-low interest rates and new government regulations by expanding their jumbo loan lending practices. The jumbo mortgage market poses less of a risk to big banks as default rates are relatively low because pristine credit is a must. Some banks offer jumbo loans for as low as 10% down payments, 65% loan to value ratios, and $10 million mortgages. Citibank reports an increase in jumbo loan applications by 30% over the preceding two months. Bank of America views the jumbo mortgage market as a competitive landscape that will help the housing market recover. Some banks, such as Chase, offer refinancing to existing, well-qualified clientele at lower interest rates and little to zero closing costs. Such forgiving refinancing options can save borrowers a thousand dollars or more in monthly mortgage payments. Those savings could then be re-invested into the economy as discretionary income, which could feasibly aide the economy in a healthy recovery.
Meanwhile, Fannie Mae and Freddie Mac continue to fuel the profitability of big banks as they request additional aide from the U.S. Treasury Department, in the amounts of $1.5 billion and $1.8 billion respectively. On August 5, Fannie announced a $1.2 billion second-quarter loss and Freddie reported a net loss of $4.7 billion. Losses are largely attributed to delinquent loans originated during the housing boom. As these two government sponsored enterprises flounder about for more funds, financial institutions re-strategize providing the luxury housing market a boost with jumbo mortgage loans.