Jumbo Mortgages

Rising House Costs Increase Demand For Jumbo Mortgages


Demand for purchase credit surged last month to levels near record highs seen in March, but rising house prices mean homebuyers are increasingly having to apply for jumbo loans, which traditionally come with higher interest rates.

The latest report from the Originations Market Monitor of mortgage and real estate data aggregator Black Knight shows that interest freezes on purchase loans rose 6 percent in the last month, undoing two consecutive months of the decline. Cash-out refinancing also increased by 10 percent, while interest and term refinements fell by 4 percent.

Non-compliant “jumbo” mortgages accounted for 12.4 percent of all purchase and refinancing freezes, up from 5.25 percent a year ago. Compliant mortgages, which can be bought or guaranteed by mortgage giants Fannie Mae and Freddie Mac, accounted for 65 percent of all mortgage locks in June, up from 72.3 percent a year ago. FHA loans reached a market share of 12 percent compared to 10.2 percent a year ago.

Rate the lockout volume by loan product. Source: Black Knight Originations Market Monitor.

The record-breaking rise in home prices is changing the behavior of borrowers and the composition of the mortgage market, Scott Happ, president of Black Knight Secondary Marketing Technologies, said in a statement.

Rising home prices go hand in hand with “the sustained, growing jumbo share of lending in the market and the decline in the corresponding share,” said Happ. “With stable interest rates and strong purchase credits, additional growth in home prices could further reinforce this trend.”

The latest Black Knight Home Price Index showed that single-family home prices rose 18.3 percent year-over-year in May, while condominium prices rose 13.1 percent during that time. That said, even if interest rates remained low, homebuyers would have to spend an average of 21.3 percent of median household income on monthly mortgage payments, up from 18.1 percent at the beginning of the year.

Source: Black Knight Mortgage Monitor

In markets like Los Angeles, monthly mortgage payments can represent up to 46.5% of median household income, “a worrying number for buyers hoping to make the leap into the home,” said Black Knight analysts.

According to the National Association of Realtors, existing home prices hit a record high of $ 350,300 in May, an annual increase of 23.6 percent. The appropriate credit limit is adjusted annually based on a house price index maintained by Fannie and Freddie’s regulator, the Federal Housing Finance Agency.

In most of the United States, the compliant credit limit for 2021 is $ 548,250. Larger “jumbo” loans cannot be bought or guaranteed by Fannie and Freddie, although the mortgage giants can borrow up to $ 822,375 in expensive real estate markets.

The Federal Housing Administration will insure mortgages that do not exceed 65 percent of the compliant credit limit or $ 356,362 in most markets. In high-cost areas, FHA will match Fannie and Freddie’s cap of $ 822,375. However, FHA-insured loans usually come with higher interest rates and upfront and annual insurance premiums.

Jumbo mortgage rates are covered by FHA compliant loans. Source: Black Knight Originations Market Monitor

In the early days of the pandemic, lenders like Wells Fargo cut jumbo mortgage loans or raised interest rates to offset the greater risk of making loans that weren’t covered against losses from Fannie, Freddie, or FHA.

A year ago, jumbo loans had higher interest rates (3.32 percent) than compliant loans (3.12 percent) or FHA loans (3.16 percent). But at 3.10 percent, 30-year jumbo mortgage rates are currently cheaper than compliant loans (3.16 percent) or FHA loans (3.23 percent), according to Black Knight.

“A rapidly recovering economy and labor market have released jumbo loans as banks can draw on deposits,” Mortgage Bankers Association forecaster Joel Kan noted in June.

But jumbo loan rates could rise rapidly in the months ahead as lenders and secondary investors buying mortgage-backed securities not guaranteed by Fannie, Freddie, or Ginnie Mae lose confidence in the economic recovery or default rates rise.

Email Matt Carter