Low Jumbo Rates Could Move Members to Banks
Two credit unions currently offering jumbo mortgage loans said they will still provide them, despite large banks in their markets beginning to aggressively price similar offerings.
Jumbo loans exceed the value of loans that can be sold to Fannie Mae or Freddie Mac. In most of the U.S., that defines the loans as those larger than $417,000, though in some higher-priced areas, the cap is $625,000.
National and regional banks have begun to price jumbo mortgages with lower interest rates than conforming loans, in part to attract high-income customers, but also for other reasons, according to an executive with a leading housing finance analytical firm.
“I agree that some banks have begun to look for higher wealth borrowers who could take one of these mortgages,” said Keith Gumbinger, vice president at HSH.com, a housing finance analysis and information site. “But they are doing so for a variety of reasons.”
Gumbinger explained that the current low interest rate environment suggests that loans taken out now are not likely to be refinanced quickly, which means wealthy borrowers could remain with their lending institutions longer.
“There is a potentially significantly longer time frame to offer wealthier customers additional products and services,” Gumbinger said. “Banks can offer investment services, other loan products or other kinds of services.”
Wealthy borrowers may also have an easier time meeting the regulatory requirements that prove they have the ability to repay these larger loans, he observed. Elements like larger down payments, smaller debt loads and larger asset pools tend to make jumbo loans, at least on paper, more secure, Gumbinger said.
Finally, banks also realize that there are limited numbers of these borrowers around, he explained.
“Not only are there not a whole lot of the borrowers who could take out a jumbo mortgage and repay it,” Gumbinger said, “they are also not found everywhere. There are only a limited number of geographic and primarily urban areas where you will find both the property prices to require these loans, as well as the people who could make their payments. So there is a lot of competition for those borrowers.”
One of those markets is Boston. That’s why the 72,250-member, $1 billion Workers’ Credit Union, headquartered in Fitchburg, Mass., decided to compete for jumbo business.
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Thomas Gray, senior vice president for lending, said the credit union had noticed some area banks dropped their rates on jumbo loans to match their rates for conventional loans. The credit union also decided it had the expertise and resources to compete.
“We started noting that the banks started dropping their jumbo loan rates from, say, half a percent over their conventional loan rates down to their loan conventional rates or even a little below,” Gray said. “So I went to my CEO about whether we wanted to compete with that, and we decided we did.”
Gray said that Workers’, which celebrates its 100th anniversary in April of next year, is headquartered west of Boston and doesn’t necessarily have a lot of branches in high real estate value areas. But the credit union’s field of membership effectively includes the entire state of Massachusetts and part of New Hampshire, and Gray said the credit union sought to serve all of its members.
“We have members who need personal loans of $500 from time to time,” he said, “but we have other members who want $50,000 CDs. We have to serve everybody,” he added, and that includes the high-cost Boston market.
“We just hired two more loan originators to help us meet some demand in the Boston market,” Gray said. “We wanted to keep up our jumbo loan effort to give them some tools.”
But another credit union, the 231,000-member, $3.8 billion Ent Federal Credit Union, based on Colorado Springs, Colo., came to a different conclusion.
Faced with similar national and regional bank moves into the jumbo mortgage market, the credit union decided not to cut its rate to match the bank rates. However, it is still offering the loans.
“We chose not to cut our rates because we determined loans of that size do carry additional risk,” said Jon Paukovitch, vice president for mortgage lending. Paukovitch said the credit union also made a determination that relatively few of its members were going to be in the market for jumbo mortgages.
“You get a lot of house in Colorado Springs for $417,000,” Paukovitch explained. “We just didn’t get a sense that there were a lot of our members who were really in that market.”
But at the same time, Paukovitch said Ent was willing to work with a member who might want one of the loans and was being offered a better rate elsewhere.
“We will continue to work with long term members, of course,” Paukovitch said, “because we want to keep them as members. But we didn’t see the need to change policy on the loans overall.”
Of course, one additional dimension to the loans is the fact that Fannie Mae and Freddie Mac will not buy them. This means that both Workers’ and Ent have strategies in place for handling the loans on their balance sheet.
Gray said Workers’ has spoken with some organizations that purchase jumbo loans. However, in most cases they also want the servicing rights, and Gray said Workers’ was reluctant to sell those. But he added the credit union had also found several different approaches to hedging its interest rate risks on fixed rate jumbo loans, and has found member interest in adjustable rate loans increasing as well.
“And those we have always kept on our books,” he said.
Gray credited the credit union’s sophisticated approach to asset and liability management and the use of hedges for its ability to keep competing in the jumbo market. He also said the credit union had been preparing for the shift from refinancing to purchase mortgages.
Ent also uses a variety of approaches to hedge risk in its larger fixed rate loans, Paukovitch said.