Instead of selling mortgages on the secondary market, large lenders are keeping them on their books and reaping the profits, which may lead to better terms for borrowers, The Wall Street Journal writes in a recent article.
The secondary market for jumbo mortgages — loans that exceed $417,000 in most places and $625,000 in high-price areas — is doing worse than a year ago, but that hasn’t stopped lender enthusiasm for the product.
Only 2.3% of all jumbo mortgages originated in the first half of 2014 have been securitized, which is much less than the 49.3% in 2005.
But lender enthusiasm for jumbos means that borrowers may be offered lower interest rates than they’d get with a government-backed conventional loan, Cameron Findlay, chief economist for Discover Home Loans, tells the WSJ.
“Because they can keep the loans in their portfolio, jumbo lenders may have more flexibility with qualification standards, so high-dollar borrowers may get slightly better terms on down-payment minimums and debt-to-income ratio requirements,” the WSJ writes.
While underwriting standards are tighter than they were before the economic downturn, jumbos are seen as a safe investment from the lenders’ perspective.
Low interest rates that banks pay on deposits have translated into cheap money that can be funneled into jumbos with attractive returns. Banks can earn an average 4.14% on a 30-year fixed-rate jumbo mortgage and 3.03% on a five-year, adjustable-rate jumbo mortgage.
But, the WSJ notes, a healthy secondary market will be necessary to sustain jumbo lending in the long run, especially as interest rates go up, the housing market fully recovers and the mortgage market grows to more normal dollar volume.
To read the full Wall Street Journal article, click here.
Written by Emily Study