Jumbo is back and is increasing market share in a big way. Recent rates for jumbo mortgages have been either close to or below conforming rates, and there has been a resurgence of private investors in the market ready to purchase this product.
As the market adjusts to the qualified mortgage (QM) rule, there is already talk about when investors will be ready to take on non-QM loans. Of course, there will need to be willing private investors to take on these loans, as the very definition of QM precludes purchase by government-sponsored enterprises Fannie Mae and Freddie Mac. Given the readiness of the private investor market to purchase jumbo residential mortgage-backed securities (RMBS), one can move toward the conclusion that the jumbo market is primed to serve as a model for new private investor interest for the impending non-QM side of the market.
Although non-QM is not currently on Titan's horizon, the overall health of the industry as it adapts to new products and investors is great for everyone – jumbo or conventional.
The return of private investors, led by firms like Redwood Trust, First Key/Cerberus and Ranieri Partners, to the jumbo market represents a push rather than a pull strategy. These players have been progressive in terms of being out in front of the market, almost in defiance of predictions of a more gradual private investor resurgence.
As the return of private money continues, a more conservative majority of investors will want to walk before they run. Part of that "walking" process will require thoroughly vetting the product through safer securities strategies that prove a sound track record of performance and stability (i.e., jumbo private-label securities). Over time, that experience will generate comfort and trust and start enticing more private investors back into the secondary market. Jumbo is clearly leading the way in this arena.Â
What makes jumbo so attractive right now, particularly with community banks and individuals looking to park their cash, is the high quality of the borrowers, the relative stability of the product and the potential for significant return on investment. Jumbo borrowers typically have high FICO scores, low loan-to-value ratios and quality property asset values. Additionally, ability-to-repay (ATR) isn't usually an issue. The irony here of ATR limiting homeownership shouldn't be lost on anyone.
Furthermore, most of the jumbo loans being extended today are extremely vanilla. Gone are the days of the rampant offering of negative amortization or interest-only (IO) loans to W-2 employees. These two particular products are now almost exclusively offered in niche models to high net-worth investors seeking to make their money work for them. This was the original intent of these types of products, so we've come full circle. High net-worth borrowers do not typically have issues with ATR and often have the financial sophistication to manage these types of products to their advantage. For borrowers simply seeking to purchase a higher-priced home, the jumbo 15-year fixed, 30-year fixed and ARM products are more than adequate to meet most borrowers' needs.
What all this means for an all-encompassing private investor market is that non-QM loans will return on a limited basis in the high net-worth market. As jumbo products already successfully serve that market, private investors can put their toes in the water before taking the leap into deeper pools of risk.
Overall, the private investor market is going to come back at the hand of jumbo because it is the most recognizable and comfortable area of lending right now to the few private investors that currently exist in the market. Furthermore, as the industry looks to live beyond QM, jumbo provides a natural bridge to non-QM loans because it sits within QM guidelines but isn't an agency product, nor is the government buying up millions of those assets. A fully blown resurgence won't happen overnight, but as more private investors begin to dabble in this arena, expect jumbo products to be the catalyst for widespread private money investment.
Ruth Lee is executive vice president of Titan Lenders Corp., in Denver. She can be reached at ruth.lee@titanlenderscorp.com.
