Market volatility has hit jumbos harder than the overall mortgage market.
Over the last year, top jumbo lenders have pulled back on the product due to surging mortgage rates and regulatory risks. Some regional banks working in the space collapsed due to a tightening monetary policy and a deposit run. Meanwhile, others have limited jumbo purchases from smaller lenders via the correspondent channel. What explains this market’s decline? And what does the future hold for jumbos? HousingWire spoke to industry experts, lenders, and loan officers to share their insights on the jumbo market. Spoiler alert: the volatile, high-rate mortgage landscape is hitting jumbos harder than the overall mortgage market.
Jumbo volume has nosedived in the traditional high-cost of living coastal markets. More pain is yet to come, primarily for depositories. Originating jumbos became trickier in the wake of the 2020-2021 refi boom. For starters, jumbo borrowers tend to be more affected by surging mortgage rates than the overall market because the loan balances are higher. The shrinking jumbo market also reflects the broader market forces related to this product — banks have historically used jumbo loans as a means to attract high-income clients who have millions in deposits. These big banks attract customers by offering low rates on home loans; then, they try to sell those clients credit cards, insurance and other products and services. Banks have a massive advantage over nonbank rivals: a balance sheet to keep jumbos in their portfolios. They don’t need to sell them immediately to investors to maintain their home loan business. “In fact, for the most part, jumbo loans over the last few years have been either originated by the bigger banks or originated by smaller lenders and sold to the bigger banks,” David Stevens, a former Mortgage Bankers Association‘s president, said. “Jumbo loans can’t be sold to Fannie Mae and Freddie Mac. So, they have to be sold into the private label market, or they have to be held on balance sheets. Independent mortgage bankers don’t have a balance sheet, so they can’t hold loans.” However, banks are facing major headwinds, which trickles down to the jumbo space. Since the Global Financial Crisis in 2008, depositary lenders have been the target of increased regulatory scrutiny. As a result, some banks decided to exit the correspondent channel, which relies on the small lenders’ production, such as community banks and independent mortgage banks, because of potential ‘reputational damage.’
The most recent change from regulators affecting banks and, ultimately, jumbo offerings, came in July. Under changes to Basel III rules, the regulators proposed a residential mortgage capital requirement for large depository institutions that far exceeded international standards. “For most of the last 10 or so years, all of the big banks and the regional banks have been competing for jumbo loans and the deposits that went with it,” Kevin Leibowitz, founder at the Brooklyn, New York-based brokerage Grayton Mortgage, said. “The thought was to win the borrower at a below market rate, and the borrowers’ assets will come with the mortgage.” Leibowitz, however, said the unfortunate reality is that those deposits weren’t ‘sticky.’ “The departure of these assets is now evident in the having to sell mortgages that were in a ‘held to maturity’ bucket on the bank’s balance sheet,” Leibowitz said. “Those assets were worth 80-90 cents on the dollar, and this created the mess from Silicon Valley Bank and First Republic. I think the days of big banks having ‘through the market pricing’ on jumbo mortgages is gone. And I don’t see it coming back.”
Source: HousingWire (Part One)