J.P. Morgan Chase & Co. is loosening its underwriting
criteria for big mortgages, as lenders ramp up competition to grab
a bigger share of the high-end housing market.
The nation's largest bank plans to announce as soon as Tuesday
that it is lowering the minimum credit score and down payment it
requires for mortgages as big as $3 million.
The New York firm's moves follow similar steps at Bank of
America Corp., Wells Fargo & Co. and other banks for
requirements on jumbo mortgages—those that exceed $417,000 in most
parts of the country or $625,500 in pricier markets. At the same
time, some big banks are backing away from smaller loans where they
see higher regulatory costs and litigation risks.
Since the financial crisis, a recovery in the mortgage market
has faced several challenges, but the jumbo market—popular with
well-heeled borrowers—has bounced back along with sales of
higher-priced homes. In the second quarter, overall jumbo
originations rose to an eight-year high of $93 billion, up 58% from
a year ago, according to a preliminary estimate from industry
newsletter Inside Mortgage Finance.
By dollar volume, jumbo mortgages given out by lenders last year
accounted for about 20% of all first-lien mortgages, used mostly to
purchase or refinance a home, according to Inside Mortgage Finance.
That is up from 5.5% in 2009. The last time jumbo mortgages
accounted for a larger share was in 2005.
"There's no question that the jumbo market has probably
recovered more than any sector of the mortgage market since the
housing crisis,"said Guy Cecala, publisher of Inside Mortgage
Finance.
Lenders have more flexibility to change criteria for jumbo
mortgages, as they generally hold on them their own books rather
than selling the loans to mortgage-finance giants Fannie Mae and
Freddie Mac, which have their own criteria.
For jumbo mortgages, J.P. Morgan plans to lower the minimum FICO
credit scores it requires to 680 from 740 for loans on primary
single-family purchases, second homes, and certain refinances on
those properties.
The moves by J.P. Morgan are in some ways more aggressive than
those of its peers. The bank is allowing a 15% down payment for
loans up to $3 million, compared with Bank of America and PNC
Financial Services Group Inc., which permit a 15% down payment for
jumbo loans of up to $1 million and $1.5 million, respectively.
"In some cases, our customers have been helped by other banks
that have different guidelines," said Sean Grzebin, head of retail
mortgage lending at J.P. Morgan. "Some of this is [about] retaining
customers we should have gotten and we hadn't because of program
restrictions."
The increase in jumbo lending underscores a housing recovery
that has been more favorable to higher-priced homes. Sales of
existing single-family homes priced between $750,000 and $1
million, for example, increased 21% in June from a year prior,
according to the National Association of Realtors. Sales of homes
priced between $100,000 and $250,000, in contrast, increased 12.5%,
while those priced lower fell 3%.
"The upper end of the segment has improved quite a bit," said
Sam Khater, deputy chief economist at CoreLogic, a real-estate
information firm. The improvement is in part because banks are
giving out more jumbo loans, as well as the recovery of the stock
market, which is highly correlated to jumbo mortgage demand, he
said
Rising home values have helped give lenders confidence that
lower down payments won't leave borrowers at risk of owing more on
their homes than they will eventually be worth.
In addition, even though banks are easing lending criteria,
mortgage industry experts say the market remains much healthier
than it was a decade ago, when low standards and poor underwriting
practices contributed to a historic plunge in U.S. housing prices.
Before the housing bust, jumbo mortgages were widely available with
no money down and for borrowers with credit scores below 640, noted
Mr. Cecala of Inside Mortgage Finance. Some lenders were also
giving out these loans without verifying applicants' income, he
said.
In contrast, borrowers who received a jumbo mortgage in May had
an average FICO score of 770—the highest since at least the
beginning of 2005—and made an average down payment of nearly 32%,
according to CoreLogic.
Steve Hemperly, head of mortgage originations at J.P. Morgan,
said the bank's decision was largely influenced by the strong
performance of the jumbo loans it has given out in recent years.
Industrywide, only about 0.8% of outstanding balances from all
first-lien mortgages went into default in June, down from 1.23% two
years earlier, according to the S&P/Experian Consumer Credit
Default Indices.
J.P. Morgan's changes, which go into effect Wednesday, will
reduce minimum down payments for some borrowers to 15% of the
purchase price for single-family homes serving as the borrower's
primary residence, down from 20% currently. That change applies to
mortgages between $1.5 million and $3 million; the bank last year
made the same change for jumbo mortgages up to $1.5 million.
The bank, the largest in the U.S. by assets, is also lowering
down-payment thresholds for jumbo mortgages used for second homes,
such as vacation homes and certain two- to four-unit properties.
The bank says the changes simplify its offerings.
J.P. Morgan, which ranks second after Wells Fargo in total
mortgage origination volume, gave out a total of $87 billion of
mortgages last year, accounting for about 7% of total mortgage
originations, according to Inside Mortgage Finance. That is down
from about 10% the prior two years and 12% in 2011.
Several large banks have recently lowered their jumbo-mortgage
requirements. Wells Fargo last year cut its minimum down payment
requirement to 10.1% from 15% for jumbo mortgages.
In June, Bank of America began allowing first-time home buyers,
which it defines as people who haven't owned a home for at least
three years, to make 15% down payments for jumbo mortgages of up to
$1 million. The bank previously excluded this group of buyers from
its 15% down-payment option, which it rolled out in 2013.
PNC in May switched to 15% minimum down payments for all
eligible borrowers for jumbo loans of up to $1.5 million, down from
20% previously. It also recently lowered the minimum required FICO
score to 700, compared with 720 a year ago.
In addition to easing standards, lenders have been trying to
appeal to borrowers with lower interest rates. Historically,
interest rates on jumbos have been higher than on smaller
mortgages. That changed last August, when for five weeks the
average interest rate on 30-year fixed-rate jumbos fell below the
average for the 30-year fixed-rate mortgages that conform to the
standards of Fannie and Freddie, according to HSH.com.
While 30-year fixed-rate jumbos on average are no longer
cheaper, they are priced very close to their counterparts, with
rates averaging 4.07% last week compared with 4.05% for conforming
loans.
"The strongest portion of the market is at the high end," said
Michael Fratantoni, chief economist at the Mortgage Bankers
Association. "You're seeing more lenders in this space…and lower
minimum down payment requirements."
Joe Light contributed to this article.
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