PERSON OF THE WEEK: Thanks to tighter credit, the jumbo mortgage market did quite well in 2016. But there are a number of misconceptions about jumbo loans – one being that they are only available to borrowers with high incomes and perfect credit scores.
To learn more about these misconceptions and also how the jumbo mortgage market will fair in 2017, MortgageOrb recently interviewed Garnet Kanouse, managing director and head of residential for Redwood Trust Inc.
Q: What are some common misconceptions concerning jumbo loans and this market?
Kanouse: I think the main misconception in the jumbo market is that every nonconforming borrower needs to have perfect credit and fall entirely inside the big bank credit box. In truth, there has been a thoughtful expansion of the credit box recently. Last year, in fact, Redwood rolled out Choice, our first expanded-prime credit program, enabling originators to serve borrowers with a less-than-perfect credit score, or a higher loan-to-value (LTV), to obtain a jumbo mortgage.
Another misconception is that credit blemishes (especially from the crisis era) disqualify borrowers from obtaining a jumbo loan. Many programs these days allow for foreclosures, short sales and modifications from that time period. We’ve seen significant movement in the availability of credit since the crisis, but it’s important to note that it has been a smart and disciplined expansion this time.
Q: How are jumbo loan guidelines changing and why? For example, credit scores, debt-to-income (DTI), down payment/LTV, etc.
Kanouse: From a jumbo investor’s perspective, guidelines post-crisis have been static and extremely conservative. Until very recently, only borrowers with perfect credit profiles have been able to qualify for jumbo loans. All these years of being told “no” have caused less-than-perfect borrowers to not even apply for a refinance or purchase money loan. This has left many qualified borrowers behind in an unprecedented low-rate environment.
Things are beginning to change, however. Our purchase criteria, for example, has expanded to allow loans down to 661 FICO, up to 90% LTV (with no mortgage insurance) or as little as three months of reserves post-closing – although, loans cannot combine all of these layers of risk at once. We allow DTIs up to 49.9%, as well.
Looking back at historical default rates and guidelines from the early 2000s, well before the expansion leading up to the crisis, it’s clear that these are still “prime” borrowers. The pendulum of credit swung too far one way leading up to the crisis and too far the other way post-crisis. We see this current credit expansion as a return to normalcy.
Q: Do you feel most mortgage loan officers (MLOs) are aware of these changes? Why or why not?
Kanouse: Post-crisis, and up until recently, we saw an almost constant decline in the 10-year Treasury yield, which resulted in refinance wave after refinance wave. This has diverted the attention of MLOs to an almost constant supply of low-hanging fruit via agency refinance opportunities. As these opportunities dry up, we think MLOs will have the time and desire to focus on the opportunities presented by new expanded jumbo guidelines.
Q: What is your outlook on the jumbo market for 2017?
Kanouse: Rates have risen significantly since early November, and there’s nothing glaringly obvious on the horizon that indicates they will reverse course. Compared with 2016, 2017 will be harder for mortgage bankers who relied on originating refinance loans for volume. Lenders and MLOs will be forced to shift their focus to purchase transactions and jumbo expanded-prime credit to make up for the lost refinance volume.
Industry-wide, I would expect traditional prime jumbo volume to be down year over year – consistent with expectations for total origination volume. At the same time, the industry should see an increase in origination volume among expanded prime products – and, hopefully, increased homeownership among many truly deserving borrowers.