Are Jumbos Increasing Risk?
An October 18 article in The Wall Street Journal points to an increase in jumbo mortgage lending, noting that “looser underwriting rules – especially income requirements – have enabled more people to qualify for credit. The article suggests the increase is a trend, and if so then, the kind of trend that lenders will have to consider when projecting future losses under CECL. Does the increase in jumbo mortgages increase risk? Will bigger mortgage loans lead to bigger loan losses? Moreover, is competition pressuring lenders to lower their underwriting standards?
Loan originators and investors who purchase loans have both lowered their standards, according to the article, but justifiably, it suggests. “ Jumbo loans, once considered risky investments due to their size, are now perceived as safe due to the strong credit of borrowers. That has created competition among both originators and investors for jumbo loans.” So safe and competitive, the article proposed, that average jumbo rates have fallen below 30-year fixed rates.
“Jumbo mortgage thresholds have been outrun by the markets,” Economist Tom Cunningham, former senior economist of the Atlanta Fed and an advisor to MST, explained. “Jumbo loans used to be for properties at the high end of the housing market, and now the market has moved enough so that the jumbo definition applies to many properties that are not particularly far from average. As prices and incomes go up and the definition of the jumbo threshold remains unchanged, an increasing share of mortgages will fall into the jumbo category. If you want to be a mortgage lender in Los Angeles, or a lot of other markets, you’re going to have to do jumbos.
“The Wall Street Journal article cites average monthly incomes of jumbo mortgage holders that are large enough to cover a $600K mortgage without anxiety. Of course anyone can get overextended on a mortgage regardless of income, but delinquency doesn’t seem to be a function of jumbos per se. In fact, overall delinquencies are at a nine-year low. It appears the mortgage market is in a pretty good position.”
We asked Tom if lower underwriting standards were a worrisome signal.
“Now that jumbos are more the norm, it is not surprising to see standards similar to those of conventional mortgages. Further, as jumbos become more common, I suspect that it will grow progressively easier to sell them in the secondary market. That doesn’t mean selling them to Fannie, Freddy or Ginnie, but it does mean a more active secondary market.”
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