Several loan officers have inquired: Why is the cost of jumbo financing so high at this time? For the past few years, it has been the same as conforming pricing and sometimes even lower than conforming. Now it is much higher–if you can find it at all. Why has this market changed so much?
To answer this question, we have to go back before the Great Recession. The real estate boom which led to the Great Recession featured a free-wheeling secondary market for mortgages. If a lender could sell a loan, they originated it. This included jumbo loans, which were traditionally priced slightly higher than conforming loans because the secondary market for jumbos was not quite as robust. During the boom, all the markets became quite robust–from subprime to jumbos.
The secondary markets collapsed during the financial crisis, leading to the Great Recession. The Fed stepped in and supported the markets. The QM restrictions of the Dodd Frank Act were designed to bring confidence back to the secondary markets. However, this was slow in coming. Therefore, most jumbo loans were not sold–they were placed in portfolios by banks.
The good news is the banks were hungry for these loans, and therefore pricing was aggressive.
Fast forward to this recession. The secondary markets have again collapsed, and the Fed again has come to the rescue. But there is no jumbo secondary market and banks are being conservative in this environment. They have either stopped putting these loans into portfolio, tightened the guidelines and/or raised the prices on them.
As the economy rebounds, I expect the banks will loosen up–but I am not sure this segment of the secondary markets will function as it did for a long time. More likely, we will have a more gradual recovery in jumbo rates as this segment of the market adjusts to the new normal. Hopefully these adjustments will happen sooner rather than later as higher home prices have put more buyers into this segment.
Dave Hershman is Senior VP of Sales of Weichert Financial. He has published seven books, hundreds of articles and is the founder of the OriginationPro Marketing System and Mortgage School. His site is www.OriginationPro.com and he can be reached at firstname.lastname@example.org.