With home prices skyrocketing during the pandemic, the market expanded significantly for jumbo mortgage loans — the high-dollar mortgages that exceed standard limits set by the Federal Housing Finance Agency.
But that dynamic has changed in the post-pandemic world. The combination of high interest rates, economic uncertainty and lenders growing cautious over changing capital requirements has drastically cut the jumbo loan market from its peak in 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 represents a 41% decline.
Nationally, the average jumbo loan amount increased from $1.09 million in 2021 to $1.22 million in 2022.
In the Philadelphia metropolitan statistical area, $7.65 billion was distributed across 9,679 jumbo loans in 2021. A year later, just $5.04 billion was given across 5,629 loans. That equates to a 34% decline in dollar value and a 42% drop in the number of loans. The number of lenders disbursing jumbo mortgages fell by 16% from 394 to 332.
Those numbers also mean Philadelphia’s average jumbo loan amount grew from $790,370 in 2021 to $895,363 in 2022 — a 13% increase.
All but one of the region’s top five jumbo mortgage lenders experienced a significant drop-off last year.
Citizens Bank topped the list of jumbo mortgage lenders in 2022, but saw its number of loans decline year over year from 646 to 519 and its dollar amount fall from $414 million to $338 million.
TD Bank fell from 439 loans for $374 million in 2021 to 299 loans for $266 million in 2022. Wells Fargo’s loan output declined from 519 loans for $474 million to 266 for $263 million. Bank of America’s loan output dropped from 397 for $354 million to 233 for $242 million. PNC Bank’s jumbo loan origination was relatively even (297 loans to 290), while it experienced a modest dip in loan amount from $207 million to $195 million.
Steve Kaminski of TD Bank
Steve Kaminski, head of residential lending at TD Bank, said elevated home prices and interest rates, along with low inventory, continue to drive declining volume for jumbo mortgages in 2023. He said the appetite for jumbo mortgages, most of which are sold to Fannie Mae or Freddie Mac and securitized, comes primarily from investors and bank balance sheets — and banks have tightened their balance sheets due to liquidity concerns.
Kaminski said he believes the top 50 mortgage lenders will see another 45% decline in jumbo mortgage origination in 2023.
“Rates were up at the beginning of 2022 — we got up to really close to 8% back in October of this year,” Kaminski said. “The increase in rates really reduces the affordability and volume overall. So no surprise that we’re down in 2022 and 2023.”
Analysts say the fall in jumbo lending 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, also 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.
Moving forward in 2024, Kaminski said he expects home demand will continue to outpace supply as long as higher rates and lack of affordability still exist. He also said inflation is “still a bit of a drag” and he does not see a change in the low inventory in the short term.
“Current homeowners are locked in at historic low rates — around 3%,” Kaminski said. “So they are unwilling to sell and it it’s unlikely we’re going to see a change in this position. All those variables I mentioned are going to be required to see some movement, especially inventories and rates.”
