The world-class jumbo mortgage business should benefit from recent revisions by the Consumer Financial Protection Bureau to the rules for qualifying mortgages and repayment options, which relax certain standards set after the financial crisis.
But those offering jumbo products have to compete with compliant lenders, whose credit limit is now $ 544,250. The new high-cost area limit of $ 822,375 for both compliant and Federal Housing Administration loans, although it applies to a much smaller group of borrowers, could also increase competition.
As property prices rise, the market for larger mortgages could expand too. Typical home value is now over $ 1 million in 312 U.S. cities, most of them in nine subway areas on the east and west coasts. That's a net profit from 45 cities last year, according to Zillow. In 2015, there were only 208 that met these criteria.
"In 2020, property values rose across the country due to incredible demand across all price tiers, which we expect to continue through 2021," said Chris Glynn, senior economist at Zillow, in a press release.
The top jumbo lenders National Mortgage News spoke to are optimistic about their outlook for this year.
"The real opportunity in 2021 is that business models that were conceived as 'red light, green light, non-QM, QM' are now blurring in terms of execution," said Brian Filkey, chief strategy officer at Interfirst. "So we're focusing on being able to borrow both agency and personal loans, which may both go through the same path of execution."
The change to the ATR rule, now based on price rather than debt-to-income ratio, eases the path for top-tier jumbo lenders, noted Matt Garlinghouse of Cherry Creek Mortgage, executive vice president of capital markets.
"The debt-income threshold has had some underwriting constraints and some hits and misses in terms of income, affordability, and repayment," said Garlinghouse. "If you think of the private sector versus the agency side for the prime jumbo market, things get more and more equitable."
The change will encourage more lending from outside the agencies or federal government-backed programs, he said. "This is actually pretty good news for the players doing something meaningful in the flawed Prime Jumbo market," said Garlinghouse.
The more flexible ATR standard allows lenders to increase the debt-to-income ratio they underwrite to manage their own risk, while also allowing them to qualify for the safe haven, said Steven Schwalb, CEO of Angel Oak Home Loans. But the company isn't going to loosen standards too drastically.
"We are of course prudent when it comes to a higher DTI," said Schwalb. "When you lend someone a million dollars, do you really want to get them cash flow over their skis? Personally, I don't. But I think we'll see some people get up to 50% DTI? Probably."
Interfirst isn't concerned about the increasing competition, Filkey said. Most of these companies that make Prime Jumbo provide other types of loans that literally fall from the sky. So how much of this product would you want to do when you can pump those very low risk loans down the other side of the fence? "
On the other hand, "we will not just take what is available today and neglect what we have to build for tomorrow," he continued. Therefore, Interfirst creates various operational functions to manage certain channels and product groups.
Filkey joined Interfirst in October. Part of his job is to create alternative sources of funding that are more immune to market disruptions such as those that emerged in March and April 2020 due to the pandemic. At Interfirst, this results from a combination of on-balance sheet and non-leverage investors, aggregation facilities that are not valued at market prices, and other execution options.
Interfirst has spent a significant portion of the past nine months working on a proprietary execution strategy that uses a reinsurance concept like agency credit risk transfer rather than securitization.
"Learn from the mistakes and stand on the shoulders of those who came before us. We are trying not to use the same exact game plan as everyone else financially," Filkey said.
At Cherry Creek, which lends in some of the higher cost markets in the Pacific Northwest, top jumbo loans make up about 12.5% to 15% of originations, while government accounts for less than 10% and compliance accounts for the rest. Still, most of their borrowers have credit scores closer to 800 than 700, Garlinghouse said.
The market upheaval at the beginning of the pandemic did not affect Cherry Creek's world-class jumbo business.
"Fortunately, some of our investor partners on the nonagency side have been quite involved and we haven't seen any major disruptions at all," said Garlinghouse. Still: "Everyone down the line, especially on the non-agency side, has, as expected, tightened the underwriting after COVID somewhat. When the dust settled, they started to open things again."
For 2021, Cherry Creek plans to expand its main jumbo origins. "We're pretty optimistic and we're looking at many different ways to get more involved in this area as an independent mortgage lender with a little eye for the future," said Garlinghouse. "So we have to be a little proactive to anticipate some things that could change and give ourselves flexibility if there is a slight disruption."
While the company is primarily a retail store, it also has a wholesale channel. The company plans to increase its prime jumbo volume in the origination segment for third parties.
In contrast, Angel Oak Home Loans only offers Prime Jumbo through its retail channel, and most of what it does is up to the QM standard, Schwalb said. He sees an opportunity ahead of him to gain a larger share of the market in high quality jumbo loans.
Prime Jumbo has been dominated for many years by banks looking for business relationships with the wealthy client. As a result, the average price for jumbo mortgages was lower than listed for compliant mortgages over longer periods of time.
The pandemic has changed that and the inversion has been reversed. Right now, "we're seeing a robust market for Prime Jumbo simply because the banks haven't priced it in. The execution we received was a huge competitive advantage," said Schwalb.
Because the banks were looking for the relationship, they would just force everyone out of the market. "But now there is an appetite, with liquidity for non-banks through the conduits that offer really competitive prices for the Prime Jumbo," added Schwalb.
He assumes that non-banks will remain competitive for the premium jumbo product this year.
However, if conditions change, especially as the pandemic subsides and more people are given a vaccine, the banks' appetite for risk could return and they could seek those loans again and offer lower prices than the non-banks.
However, such a change is unlikely to take place until the latter part of 2021 or the earlier part of 2022, added Schwalb.