Wealthy home buyers signed up for these loans in droves last year because of their low rates and flexible repayment options. The total dollar amount of originated private jumbo mortgages—which exceed $417,000 in most parts of the country and $625,500 in pricey housing markets such as New York and San Francisco—was on track to be the highest since 2007.
But the jumbo-mortgage landscape is shifting this year. New mortgage rules from the Consumer Financial Protection Bureau, which go into effect on Jan. 10, could limit choices. Other regulatory actions are also expected to kick in that could make credit access on the high end more expensive.
Despite the changes, there is a silver lining for wealthy buyers: More lenders are competing for their attention, which means that rates on jumbo mortgages could rise at a slower pace than other loans. Lenders could also require smaller down payments.
Here are five changes to expect in 2014:
Fewer types of jumbos
Several jumbo-mortgage repayment options are tougher to find. That includes the interest-only jumbo mortgage, which doesn’t require principal payments during the first few years, and many mortgages with balloon payments that require small monthly payments and a lump-sum payment to pay off the remaining balance after five or seven years.
Mortgages that are originated with these features fall outside of the definition of a “qualified mortgage,” which was first established by the Dodd-Frank financial reform bill of 2010 and whose terms were announced by the CFPB. Lenders can still originate these loans if they believe the applicant has the ability to repay, but they stand to incur more risk going forward. Should borrowers default, they could challenge foreclosure proceedings by arguing the lender didn’t properly vet them to confirm that they can afford the loan.
Some lenders are requiring borrowers to make large down payments. National lender EverBank, for instance, says it requires at least a 35% down payment for interest-only jumbo loans, compared with 20% for other jumbos. Some lenders have been scaling back. By the third quarter of 2013, interest-only mortgages accounted for roughly 3.2% of jumbo mortgages that were being securitized, down from 8.5% the prior quarter, says Guy Cecala, publisher of Inside Mortgage Finance.
Lower down payments
Lenders started lowering down-payment requirements last year. Most notably, Wells Fargo began accepting 15% down payments for jumbos, down from 20%, and Bank of America made the same change for loans of up to $1 million. Experts say more lenders will likely follow and that some will begin accepting 10% down payments.
Low down payments allow affluent borrowers to lock less cash into a home and to invest it elsewhere. For lenders, lower down payments help attract more applicants and are a sign lenders are becoming more comfortable loosening underwriting guidelines.
So far, most jumbo lenders aren’t requiring private mortgage insurance—an added expense that was widely employed during the housing boom to lessen losses from borrowers who went into foreclosure. But that is expected to change this year. Private insurers say lenders have been contacting them about reintroducing this cost.
Higher hurdles for “nonqualifed” mortgages
Lenders that originate “nonqualified” jumbos are raising requirements for borrowers.
For instance, in most cases qualified mortgages don’t permit borrowers to end up with a debt-to-income ratio—the percentage of their monthly gross income that goes toward paying debt—that exceeds 43%. Zions Bank, which is based in Salt Lake City, is originating jumbos for borrowers with a DTI as high as 50%. But those borrowers need to meet stricter guidelines, including a higher FICO credit score and provide documentation proving they have six to 18 months of mortgage payments (including taxes and insurance) in cash reserves, says Kim Casaday, president of the bank’s home-financing division.
Separately, fewer lenders will make exceptions for borrowers who don’t supply full income documentation. Affluent jumbo borrowers have been able to provide partial documentation with some lenders and still get approved—a setup that helped those who are self-employed or have complex income structures.
But the CFPB’s new mortgage rules prohibit low- and no-documentation mortgages. These loans “may be much harder to come by,” says Keith Gumbinger, vice president at mortgage-info website HSH.com.
Bigger push to ARMs
Banks will likely ramp up their pitches for adjustable-rate jumbos—in indirect ways. Tom Wind, executive vice president of home lending at EverBank, says lenders will slowly raise rates on 30-year fixed-rates jumbos, which will result in more borrowers turning to ARMs.
Banks hold most private jumbos on their books and prefer ARMs because once their rates reset, they stand to receive larger interest payments from borrowers. While the CFPB’s new mortgage rules have made qualifying for these loans tougher—lenders can no longer approve borrowers based on the loan’s introductory rate—that is unlikely to affect wealthy home buyers who have the income or assets to qualify at a higher rate.
Mortgage experts say jumbo rates are likely to remain low this year in comparison with non-jumbos. Lenders are still courting affluent borrowers and want to add more of these loans to their books. The lowest rates will continue to be on the adjustable-rate jumbos while fixed-rate jumbos are expected to get pricier later in the year.
Further rate increases could come by next year as well. A rule proposed under the Dodd-Frank law will require the small number of securitization firms—which sell mortgages to investors—to retain 5% of the loan amount on their books.
The Treasury Department is coordinating the rule, which will be completed by six federal agencies. This rule will likely result in the companies asking investors for a higher price for those loans, which will trickle down to higher rates for borrowers.