Correction: An earlier version of this column misstated the name of an organization. It is the Independent Community Bankers of America, not the Independent Community Bankers Association. This version is corrected.
How big a deal is the upcoming cutback in mortgage limits for Fannie Mae, Freddie Mac and the Federal Housing Administration? Will buyers and sellers who depend on jumbo-size loans find themselves in a financing squeeze after Sept. 30, when the limits plunge in key markets across the country ?
Housing and realty lobbies are pushing hard on Capitol Hill for a continuation of the $729,750 maximum in high-cost areas, but one industry is delighted by the prospect and is gearing up to fill the gap.
From small community banks to megabanks, the message is the same: Bring on the switch to lower limits. We plan to expand our jumbo loan business wherever market demand requires. There will be no financing squeeze for anyone who needs a mortgage too big for Fannie Mae, Freddie Mac or the Federal Housing Administration, provided the applicant is creditworthy and can make enough of a down payment.
Congress raised the conventional and FHA limits during the economic crisis to ensure access to capital for buyers and refinancers. Those limits are scheduled to adjust downward Oct. 1 unless lawmakers agree to an extension – a move that would run counter to calls from Republicans and the Obama administration to reduce the federal footprint in the mortgage arena.
Federal guarantees support loans purchased, securitized or insured by Fannie, Freddie and FHA, putting taxpayers’ dollars at risk in the event of foreclosures. Fannie and Freddie together have sopped up more than $150 billion in direct taxpayer assistance since being placed in federal conservatorship three years ago because of mounting losses from loan defaults.
On Oct. 1, the maximum loan at each of the three federal mortgage giants is scheduled to fall to $625,500 in the nation’s priciest housing markets. Although the upper-limit would be only $104,250 below where it is today, some realty and business analysts worry that buyers needing big mortgages — especially in parts of California, New York, New England, Florida and the Washington, D.C., region — will be forced to make much heftier down payments or pay higher interest rates or that they will be prevented from buying the house they want altogether.
Bankers say those worries are way overblown. Cam Fine, president and chief executive of the Independent Community Bankers of America, said his 5,000-plus members plan to take up the slack in the jumbo arena and have the financial capacity to do so. Community banks, which generally range up to $20 billion in assets, “are very adept at creating products that fit the needs of customers,” Fine said.
Matt Vernon, national mortgage sales executive for Bank of America, the country’s largest by assets, said his institution has been aggressive in the jumbo segment for more than a year, and is planning to pick up the pace even more in the coming months. Bank of America funded $4.1 billion in jumbos during the first quarter of this year alone.
Meanwhile, interest rates on jumbos are near their lowest levels ever. They’re in the 5 percent range for 30-year fixed-rate loans and around 3 percent for some hybrid adjustables. Spreads between conventional-size loans and jumbos have narrowed from between 2 percent to 2.5 percent three years ago to just above half a percentage point today. On loans of $400,000, Bank of America is offering “5/1” adjustables at 3 percent plus 0.875 points. A 5/1 loan’s interest rate is fixed for the first five years, then converts to a one-year adjustable. A 5/1 loan of $800,000 goes for 3.5 percent with 0.875 points. Other big banks have competitive rates of terms.
Noah Wilcox, chief executive and vice chairman of Grand Rapids State Bank in Grand Rapids, Minn., said community banks such as his can essentially tailor jumbo mortgages for individual customers because they retain all the loans in their own investment portfolios.
“We’ve seen jumbos with 10 percent down payments” and other exceptional terms for clients, Wilcox said in an interview. Based on the borrower’s income and assets and the value of the house, “if it makes sense,” his bank will try to do it or at least consider it.
Bankers’ aggressive expansion plans and big promises notwithstanding, there are sobering realities that home buyers seeking jumbos are likely to confront when Fannie, Freddie and FHA are no longer in the picture. Tops on the list: If you thought underwriting standards are strict already, be prepared for even tougher evaluations by community and national banks.
Second, unlike nondepository mortgage companies, banks prefer to do jumbos primarily or solely for applicants who are their customers and have some sort of account established. So if you haven’t deposited money or established some sort of relationship with the bank, don’t expect to see its best deal.