Jumbo Loan Fallout | Into Everyone's Pockets
Before the real estate meltdown of 2008/2009, large lenders were notorious for bundling the Jumbo Loans (loans that exceed $625,500) on their balance sheets and selling them on the secondary market. Obviously this proved to be disastrous.
According to Inside Mortgage Finance, an industry newsletter, the secondary market for Jumbo Mortgages is doing worse than a year ago. Only 2.3% of all jumbo mortgages originated in the first half of 2014 have been sold on the secondary market compared with the peak of 49.3% in 2005.
WHY IS THAT??
Lenders benefit because keeping these jumbo loans in their portfolio allows them to reap the profits themselves. Consider this example. According to Cameron Findlay, chief economist for Discover Home Loans, low interest rates that banks pay on their deposits have translated into cheap money that can be funneled into jumbo loans with attractive returns. Savings accounts pay average annual yields under 1%. By comparison, banks can earn an average 4.14% on a 30-year, fixed rate jumbo mortgage, according to mortgage-information site HSH.com as of September 5.
Believe it or not, the phenomenon above has created an advantage for borrowers as well. By keeping the loans in their portfolio, jumbo lenders may have more flexibility with qualification standards, so borrowers may get slightly better terms on down payment minimums and debt-to-income ratios. In addition, because the jumbo loans are held by the banks that make the loans, they are able to lower the rates to attract desirable borrowers. According to HSH.com, as of September 5, 2014, jumbo loans have carried lower average fixed interest rates than smaller home loans for 5 consecutive weeks, the longest such stretch since at least 1986.
In summary, we, as consumers, are able to borrow more at lower rates and favorable conditions. Lenders on the other hand make more money on the money that we borrow, which in turn means that they are less likely to package the loans and sell them on the secondary market. Hence, A WIN/WIN SITUATION