The jumbo market’s turning point (Part I)

Over the last year, top jumbo lenders have pulled back on the product due to surging mortgage rates and regulatory risks. Some regional banks working in the space collapsed due to a tightening monetary policy and a deposit run. Meanwhile, others have limited jumbo purchases from smaller lenders, like First Savings, via the correspondent channel. 

It is reflected in Busch’s portfolio. In June, only 30% of his mortgage production came from jumbo loans. To adapt to a shrinking market, the banker is focused on different borrower types who need non-jumbo products. 

“We’ve concentrated more on the Fannie Mae, Freddie Mac, FHA, VA space. So, we’re going after more government and conventional loans,” Busch said. 

Busch’s experience illustrates how painful the jumbo loans downturn has been for bankers. But what explains this market’s decline? And what does the future hold for jumbos?

For this two-part series, HousingWire crunched the numbers to reveal how fast the jumbo space is shrinking and the markets that are most affected by this decline. Our analysis of Home Mortgage Disclosure Act (HMDA) data focuses on conventional, non-conforming first-lien mortgages used to purchase or refinance single-family dwellings.

In addition, HousingWire spoke to industry experts, lenders, and loan officers to share their insights on the jumbo market. 

Spoiler alert: the volatile, high-rate mortgage landscape is hitting jumbos harder than the overall mortgage market. Jumbo volume has nosedived in the traditional high-cost of living coastal markets of California, Florida and New York. More pain is yet to come, primarily for depositories.

For 138 lenders, no more jumbos! 

HousingWire’s data analysis shows that 3,122 lenders originated at least one jumbo loan in 2022, which means that 138 lenders exited the space last year, per the HMDA data. 

But go back a couple years and a more alarming pattern emerges for jumbo-focused bankers: 904 companies have stopped originating jumbo loans since 2018. (Overall, 1,173 lenders chose to stop originating conforming mortgages in the same period.)  

Jumbo production fell to $377.9 billion in 2022, down 41.3% from $643.4 billion in 2021 and closer to the level of 2019, when lenders originated $389.3 billion with the product. Jumbos represented 22.7% of residential single-family mortgage volume in 2022, up from 19% in the previous year but down from 24.4% in 2018. 

Inside Mortgage Finance (IMF) data illustrates the recent trend lines: in the first quarter of 2023, lenders originated $37 billion in jumbos, down 36% quarter over quarter and 72% year over year. Jumbos’ decline year over year is greater than the 61% decrease in the overall mortgage market.  

California is the country’s most prominent market for jumbo loans. In 2022, volumes reached $117.5 billion, about 31% of all jumbo originations in the U.S., according to HousingWire’s analysis. Florida followed as a distant second with $32.3 billion originated in 2022 and New York was third at $27 billion.

The California housing market in particular has been extremely slow this year, with inventory at all-time lows and few home sales. In June, existing single-family home sales declined 4% from May and 19.7% from June 2022. Insurers State Farm and Allstate announced that they would no longer be accepting new applications for business and personal lines of property and casualty insurance in California due to increased wildfire risks and rising construction costs. It all affects jumbos.

In D.C., where Busch originates loans, jumbos comprised 32.4% of conventional mortgages originated last year. Nationwide, that share is only eclipsed by California (40.3%) and Connecticut (32.8%). The geographic dynamics of jumbo loans have slowly changed since the pandemic, experts say.  

Liz Bryant, head of retail mortgage sales at Citi, said that jumbo mortgage demand is typically stronger in high-cost coastal markets. However, the recent migration from these markets, spurred by Americans working from home in other states, has led to rising home values elsewhere, making demand for jumbos stronger in different places in the country.

“Top jumbo markets still include the New York tri-state area, Miami, Southern California, and the San Francisco Bay area, but have extended into other markets with high relocation activity,” Bryant said. 

According to Bryant, Seattle, Denver and Austin are examples of other markets that have experienced substantial employment and housing demand in recent years and thus heightened demand for jumbo loans. 

Texas was the fourth-largest market for jumbos in 2022, at $24.4 billion. Washington was the fifth ($17.7 billion), Massachusetts sixth ($15.1 billion) and Colorado seventh ($14.3 billion). 

A tough moment for banks 

Originating jumbos became trickier in the wake of the 2020-2021 refi boom. For starters, jumbo borrowers tend to be more affected by surging mortgage rates than the overall market because the loan balances are higher. 

The shrinking jumbo market also reflects the broader market forces related to this product — banks have historically used jumbo loans as a means to attract high-income clients who have millions in deposits.

These big banks attract customers by offering low rates on home loans; then, they try to sell those clients credit cards, insurance and other products and services. In addition, banks offer super-cheap jumbos to entrepreneurs, venture capitalists and other clients so they can issue commercial loans to their companies. 

Banks have a massive advantage over nonbank rivals: a balance sheet to keep jumbos in their portfolios. They don’t need to sell them immediately to investors to maintain their home loan business. 

“In fact, for the most part, jumbo loans over the last few years have been either originated by the bigger banks or originated by smaller lenders and sold to the bigger banks,” David Stevens, a former Mortgage Bankers Association‘s president and Federal Housing Administration commissioner, said. 

“Jumbo loans can’t be sold to Fannie Mae and Freddie Mac. So, they have to be sold into the private label market, or they have to be held on balance sheets. Independent mortgage bankers don’t have a balance sheet, so they can’t hold loans. And without much of a private label securitization market, they sell them through the correspondent lending channel.” 

However, banks are facing major headwinds, which trickles down to the jumbo space. 

Since the great financial crisis in 2008, depositary lenders have been the target of increased regulatory scrutiny. As a result, some banks decided to exit the correspondent channel, which relies on the small lenders’ production, such as community banks and independent mortgage banks, because of potential ‘reputational damage.’ 

The most emblematic case is Wells Fargo. In January, the bank announced plans to close its correspondent business. The decision affects companies like First Savings, a correspondent partner. And bankers like Busch. 

Busch said underwriting on jumbos had tightened significantly over the last year, with depository lenders making fewer exceptions to their standard guidelines. Rates for jumbo loans at bank branches are also competitive compared to those offered to their correspondent partners. 

“At one of the biggest players in the secondary market for correspondent lending, if you go straight to the bank, you can get a mortgage on a 30-year fixed rate at 6.5%. For us, that same rate through their correspondent channel is 7%. When banks do jumbo loans, they want to have money from the client in the bank. It’s all about liquidity,” Busch said. 

On average, jumbo mortgage rates in the primary market remain modestly above conforming rates. At HousingWire’s Mortgage Rates Center, Optimal Blue data showed rates for 30-year conforming at 6.97% on Aug. 7, compared to 7.14% for jumbo loans. 

Kate Amor, senior vice president and head of enterprise products at Guarantee Rate, said that since the last great recession, jumbo pricing started to move inside of conforming pricing, something that had not previously been the case. The prevailing wisdom at the time was that jumbo borrowers had survived the last downturn; therefore, they were a great credit risk. 

“The positive spread between jumbo and conforming rate has always been driven by bank portfolio takeouts, whether in retail or correspondent (not so much wholesale), not by securitization, so the regional bank crisis is definitely causing the spread to invert,” said Amor. 

“In some ways, the market is returning to historic jumbo pricing.”

Stricter capital rules 

The most recent change from regulators affecting banks and, ultimately, jumbo offerings, came in July. Under changes to Basel III rules, the Federal Reserve, Federal Depository Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) proposed a residential mortgage capital requirement for large depository institutions that far exceeded international standards. 

First-lien whole loans prudently underwritten and performing to their original terms receive a 50% risk weight. Under the draft proposal, 40% to 90% risk weights would be assigned for large banks issuing residential mortgages, depending on the loan-to-value ratio (LTV), which is 20 basis points above the international standard.

Bose George, managing director at Keefe, Bruyette & Woods (KBW), said the rule would impact the jumbo market, but this is a very high credit quality space. It means only a few loans would fall into the category of high LTV, ultimately having higher capital requirements. 

“We are assuming that the impact in the jumbo space is probably going to be slightly higher mortgage rates, as opposed to volume significantly shifting to the nonbanks,” George said. “Right now, there’s a gap between where banks offer rates on jumbo and where the securitization market needs to be. So, if we have rates go up by 5 or 10 basis points, it’s not going to move that away from the banks on the jumbo side.”

Executives at New York-based Rithm Capital, who said the market is at a transition point in tightening from monetary to regulatory, estimate that regulations open up over $1.5 trillion to $2 trillion in funding needs with $170 billion in additional capital requirements for banks. Assets impacted include mortgages, funding to corporates, market-making and trading intermediations and fee-based businesses. 

New regulatory requirements only added to the tightening monetary policy, leading to bank failures this year. Industry experts said that recent bank crises — including Silvergate Bank, Silicon Valley Bank and Signature Bank collapses and the First Republic rescue by JPMorgan Chase — inevitably hit the jumbo space harder than the overall mortgage market. 

“For most of the last 10 or so years, all of the big banks and the regional banks have been competing for this business [jumbo loans] and the deposits that went with it,” Kevin Leibowitz, founder at the Brooklyn, New York-based brokerage Grayton Mortgage, said. “The thought was to win the borrower at a below market rate, and the borrowers’ assets will come with the mortgage.”

Leibowitz, however, said the unfortunate reality is that those deposits weren’t ‘sticky.’ 

“The departure of these assets is now evident in the having to sell mortgages (mortgage-backed securities) that were in a ‘held to maturity’ bucket on the bank’s balance sheet,” Leibowitz said. “Those assets were worth 80-90 cents on the dollar, and this created the mess from Silicon Valley Bank and First Republic.” 

“I think the days of big banks having ‘through the market pricing’ on jumbo mortgages is gone. And I don’t see it coming back.” 

Flávia Furlan Nunes, a Mortgage Reporter at HousingWire, reported this story. Will Robinson, a Data Journalist at HousingWire, analyzed the data and created the visualizations. They can be reached at [email protected] and [email protected].