This shouldn't be a big surprise to anyone who's applied for a mortgage over the past five years, but millions of highly qualified homeowners are being shut out of the mortgage market, escpecially in the jumbo market, while millions more marginally qualified borrowers are taking out mortgages with record low rates with very little down payment.
Every day for the past month, I've spoken to a Realtor seeking financing for their client or from a prospective borrower, who on paper is in the top 5% of mortgage credit risks (my estimate, not from a study) in the entire country.
Yet, for one reason or another, this borrower falls outside the ultra narrow underwriting box that a person needs to fall into in order to get a new mortgage or refinance an existing loan. It's maddening to buyers, sellers, and existing borrowers looking to lock in ultra-low rates for the long-term. Most borrowers are keenly aware that the big banks haven't been foreclosing on million dollar homes, which has held back inventory, and combined with ultra low rates (for those who can find jumbo financing), have kept high-end home prices a little higher than they should be if the market weren't being manipulated by The Fed and the big banks.
In the jumbo mortgage market, many of these borrowers have adjustable rate mortgages (ARMs) that have been adjusting downward into the 3-4% range since 2009. They are smart enough to know that low rates and low payments don't last forever. So they want to lock in what they currently have for the long run.
Some jumbo borrowers are able to find financing with portfolio lenders who specialize in making loans to higher net worth individuals in higher priced locations. These portfolio banks like issuing ARMs rather than 30 year fixed mortgages, because, unlike Fannie/Freddie investors who only take on interest rate risk (not credit risk - Fannie/Freddie guarantees payments), portfolio banks take on interest rate risks against what they pay out in deposits and they also take on all the credit risk of default. Loan terms are often limited to five years, or running parallel to five year CDs the bank offers customers. The two often go hand-in-hand.
Jumbo portfolio lenders may come back with a little bit higher interest rate than a conduit lender selling loans off into a private investment pool. But, jumbo portfolio lenders may, for a price, be more flexible in their underwriting criteria.
For borrowers with jumbo loans who've been told no a few times already, it makes sense to pursue financing with a jumbo portfolio lender, who has more freedom to get creative to make a loan work. Either that, or ride out the low rate adjustable period as long as it lasts and hope that when rates start to rise and inventory manipulation dissapates, new jumbo loan programs will be available to counteract falling prices in the high-end real estate market.
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