Big dollars, big declines: The jumbo mortgage market is fizzling

As home prices skyrocketed during the pandemic, it drastically expanded the market for jumbo mortgage loans — the high-dollar mortgages that exceed standard limits set by the Federal Housing Finance Agency.

But between higher interest rates, economic uncertainty and lenders growing cautious over changing capital requirements, the market for jumbo loans is a mere sliver of what it was during 2020 and 2021.

According to a recent analysis of LendingPatterns data by The Business Journals, jumbo loan origination volume cooled from $753 billion in 2021 to $497 billion in 2022 — a nearly 34% decline. Lenders also doled out about 285,000 fewer jumbo loans, which represented a 41% decline.

The average jumbo loan amount increased from $1.09 million in 2021 to $1.22 million in 2022.

Analysts say the trend is continuing in 2023 as overall mortgage applications dwindle — thanks in large part to high interest rates.

But there are also some factors that are weighing more heavily on the jumbo market than the mortgage sector at large.

Erica Adelberg, chief mortgage-backed securities strategist for Bloomberg Intelligence, said the jumbo mortgage market has continued to cool in 2023.

“Between interest rates rising and a lack of bank lending issuances, (the jumbo loan market) is less than half of what it was pre-pandemic,” she said. “And it’s a twentieth of what it was at the peak of the pandemic.”

Between 2020 and 2021, jumbo loan securitization more than doubled as home prices soared, according to an analysis by CoreLogic, with 2021 the highest point since 2005.

Adelberg doesn’t see the situation improving in 2024. Refinancing is at an all-time low and many prospective homebuyers continue to be plagued by affordability issues, as well as low inventory of existing homes on the market. There are efforts to change that in many cities, but it won’t be a short-term solution.

“Production has fallen quite a bit because (jumbo loans) tend to be a bank product, and the rates banks have been offering haven’t been quite as attractive because banks have traditionally kept these on their balance sheets,” she said.

With banks more hesitant to lend, Adelberg said the interest-rate spread between where jumbo loans have been offered relative to nonjumbo loans has collapsed.

“They’re (now) offered at the same level whereas (borrowers) had gotten a more advantageously low rate when taking out jumbos in the past,” she said.

Jumbo loans also typically require a lower debt-to-income ratio and stricter loan-to-value ratio. Often, the jumbo loan cannot be used to finance more than 80% of the purchase price.

The cap for a standard mortgage in 2022 was $647,200. This year, the federal government increased that threshold to $726,200 for single family homes in most areas, but the threshold is higher in some high-cost areas.

Costs associated with jumbo loans also increased from 2021 to 2022. Discount points went up an average of $1,300 as borrowers tried to reduce their rates.

Wells Fargo & Co. (NYSE: WFC) continued to be the national market share leader in 2022 with 6.17% of the national volume. But that was down from 7.49% in 2021. Bank of America Corp. (NYSE: BAC) and JPMorgan Chase & Co. (NYSE: JPM) weren’t far behind — although all three of those lenders posted similar declines in their year-over-year volume.

“Banks are pulling back on mortgage lending in general,” Adelberg said. “It just hasn’t been as profitable a business.”

Despite the significant drop in jumbo loan originations between 2021 and 2022, the number of lenders originating the high-dollar loans only dipped slightly — from 3,447 in 2021 to 3,401 in 2022.

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