Aug102015

Looser jumbo loan standards spur Orange County housing

Looser loan standards on jumbo loans will increase demand in communities like Irvine, and it may serve to push prices higher.

eliminate-lending-standardsDespite the reflation rally that drove house prices higher, sales volumes over the last few years were well below historic norms as the market slowly transitioned from an investor-dominated market to an owner-occupant one. What the housing market needs is a resurgence of job and wage growth to create more borrowers with the ability to sustain home ownership.

Unfortunately, the people who make a living from real estate transactions really don’t care whether or not a buyer who borrowers most of the money can sustain home ownership; they care about doing the deal and getting paid.

So while the sane, stable policy solution is to focus on creating growth, instead realtors, homebuilders, and originate-to-sell lenders endlessly lobby for lower lending standards to generate more short-term fee income. Despite the carnage in their industries caused by the collapsing housing bubble, they steadfastly refuse to learn the lessons about long-term market stability. So be it.evil_banker_bunny

The competition for business will prompt many lenders to loosen their lending standards to qualify more people. As long as they endure the consequences of this behavior, events tend not to spiral out of control, most often because the perpetrators go bankrupt before they impact the entire market.

Lenders who loan outside the safe-harbor standards of Dodd-Frank can do so as long as they retain some of the risk on their own balance sheet. Generally, jumbo loan lenders keep the loan on their balance sheet as a portfolio loan, so jumbo lending tends to be the most conservative — and most reflective of an unsubsidized mortgage market.

With three years of house price stability and an improving economy, lenders in the jumbo market are willing to take on more risk to do more business. With this allow more marginal borrowers in high-wage areas like Irvine to buy houses? And will this additional demand serve to push prices even higher?

J.P. Morgan Loosens Terms for Jumbo Mortgages

As high-end housing rebounds, banks woo the largest borrowers; lower requirements for down payments and credit scores

By AnnaMaria Andriotis, Updated Aug. 4, 2015 MI-CK996_JPMMOR_16U_20150804182705

J.P. Morgan Chase & Co. is loosening its underwriting criteria for big mortgages, as lenders ramp up competition to grab a bigger share of the high-end housing market.

The nation’s largest bank by assets plans to announce Wednesday that it is lowering the minimum credit score and down payment it requires for mortgages as big as $3 million. …

In the second quarter, overall jumbo originations rose to an eight-year high of $93 billion, up 58% from a year ago, according to a preliminary estimate from industry newsletter Inside Mortgage Finance.

By dollar volume, jumbo mortgages given out by lenders last year accounted for about 20% of all first-lien mortgages, used mostly to purchase or refinance a home, according to Inside Mortgage Finance. That is up from 5.5% in 2009. The last time jumbo mortgages accounted for a larger share was in 2005.

“There’s no question that the jumbo market has probably recovered more than any sector of the mortgage market since the housing crisis,” said Guy Cecala, publisher of Inside Mortgage Finance.

Lenders have more flexibility to change criteria for jumbo mortgages, as they generally hold them on their own books. Many smaller home loans are sold by lenders to mortgage-finance giants Fannie Mae and Freddie Mac, and must conform with their criteria.

For jumbo mortgages, J.P. Morgan plans to lower the minimum FICO credit scores it requires to 680 from 740 for loans on primary single-family purchases, second homes and certain refinances on those properties.The moves by J.P. Morgan are in some ways more aggressive than those of its peers. The bank is allowing a 15% down payment for loans up to $3 million, compared with Bank of America and PNC Financial Services Group Inc., which permit a 15% down payment for jumbo loans of up to $1 million and $1.5 million, respectively.

Any increase in the size of the demand pool will serve to put pressure on prices, but unless these new buyers are armed with toxic loans, they will not be able to inflate a new housing bubble. Increasing buyer pressure adds to the strength of the housing market. Let’s hope this time that regulators limit this demand to borrowers who can reasonably expect to sustain homeownership.

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