Credit Unions Explore Jumbo Market
Credit unions in certain parts of the country have begun to join banks in offering jumbo mortgages. However, executives at those institutions said jumbo loans must be accompanied by additional underwriting measures.
Jumbo loans refer to those valued higher than the amount of their balance limit when put up for sale on the secondary market through Fannie Mae or Freddie Mac. In the majority of the country, loans are considered jumbo when they carry balances higher than $417,000, but the Federal Housing Finance Administration has set higher limits in counties with higher home prices. In some counties, jumbo loans are those above $729,750 – the highest cap set by FHFA.
Jumbo loans drew attention in the wake of the Great Recession when critics blamed them, in part, for helping to inflate the housing bubble that burst and launched the economic downturn – and during that time, they largely disappeared from the market.
Jumbo lending began to return, experts said, when housing prices and values started to rise. It has since picked up velocity, but only in select markets where real estate prices have reached a threshold, according to data from the National Association of Realtors.
Many, but not all, of these types of loans were made in California, in large metropolitan areas such as San Francisco, San Jose and the Silicon Valley, Los Angeles and San Diego. However, other metropolitan areas containing pockets of hot real estate prices, such as Boston, Chicago, Miami, Seattle and Portland, Ore., also saw jumbo mortgage lending return along with higher home prices, the NAR said.
Because jumbo loan definitions vary, and because the NCUA did not collect data on jumbo mortgage lending, it's hard to say just how many of these types of loans credit unions have made.
The Pleasanton, Calif.-based mortgage software firm Ellie Mae, which counts many credit unions and banks among its clients, reported that in July 2015, 23 credit unions in California originated at least 65 jumbo mortgage loans. However, the company pointed out that this number was not definitive because the firm tracked mortgage originations according to the credit union's location, while a jumbo classification depends on the county in which the property is located.
In other words, a mortgage might be considered jumbo in the county where the property is located, but not be considered a jumbo mortgage in the county where the credit union is headquartered, Ellie Mae Director of Corporate Communications Erica Harvill explained.
The California Association of Realtors reported that in July 2015, 22% of the state's mortgage loans were valued at $750,000 or higher, which is higher than the cap for conventional loans in counties with the most expensive homes; in July 2014, this figure stood at 21%.
In addition, each of the three price categories that represent jumbo loans saw double digit July sales gains, according to the association. Sales of real estate valued from $750,000 to $999,000 rose by 23.3% year over year from July 2014 to July 2015, CAR reported. Sales of properties valued at $1 million to $2 million rose by 20.9% over the same period, and sales of property valued at more than $2 million rose by 13.5%.
CAR's chief economist, Leslie Appleton-Young, explained that a number of factors fed into the high prices in some California markets, and said the association remained confident that the state was not seeing a bubble return.
“We aren't seeing a bubble because we haven't seen the return of the crazy sorts of behavior we saw before,” Appleton-Young said, adding that a number of fundamentals, such as supply and demand, were keeping prices high.
“California is a premium place to live for many people,” Appleton-Young said. “Whether for the climate, the proximity to the seashore, the variety of outdoor activities – a lot of people would like to live here. But at the same time, we have a number of factors that keep new housing from being built.”
As an example, Appleton-Young pointed out that California's Environmental Quality Act, which has been on the books and more or less unmodified since 1970, makes it very easy for local residents and governments to delay new housing construction almost indefinitely.
“Local residents and communities have a great deal of say over things like housing development and there can be a lot of NIMBY here,” Appleton-Young said, using a common acronym that refers to local opposition to residential change, Not In My Backyard.
Appleton-Young also discounted the state's ongoing water distribution problem (she challenged the use of the word drought), wildfires, and earthquake risks as factors in the state's real estate market.
“Obviously some of these things, like a major earthquake affecting a number of population centers would be a terrible catastrophe and take a long time to recover from,” Appleton-Young said. “But they only affect the market and the value of real estate to the extent that people account for them in their desire to live in a given community, and enough people still want to live here to keep the price high.”
Patelco Credit Union Vice President of Home Loans Vince Salinas made a similar point when he explained why the credit union had confidence in the value of the real estate that underpinned its jumbo home loans.
Jumbo mortgage loans made up 23% of the Pleasanton, Calif.-based cooperative's home loans this year to date, Salinas reported, but more than 41% of the credit union's mortgage volume exists because of their higher balances.
“San Francisco is on a peninsula,” Salinas said. “Almost an island. Water on three sides. If you are working in San Francisco or in Silicon Valley, that's where you want to be and there isn't any more room for expansion there.”
He added, “It really depends on how well you know your local market. We have been here 80 years and we know our market and we know our members.”
With that said, however, Salinas added that the $4.5 billion, 280,000-member cooperative takes additional steps when underwriting loans with larger balances. The credit union asks for two appraisals of the property, or at least a review of one appraisal by another independent appraisal firm. In addition, only senior underwriters handle the larger balance loans that, Salinas said, can require many verification elements such as income.
“Some people with incomes high enough to afford some of these homes are going to be self-employed, and they might have rental income, securities income, investment income – income from multiple sources that has to be weighed and verified,” he added.
Patelco CU also usually requires a 20% down payment on these loans, although Salinas said some members under certain circumstances are permitted to put down only 10%.
Salinas acknowledged that the credit union has seen jumbo lending grow beyond where it thought it would be two and a half years ago, when it began offering the loans on a limited basis.
“We really saw it as a niche,” Salinas said. “A niche market that has taken off now.”
Meriwest Mortgage Company Vice President of Secondary Marketing Anita Domondon reported that 45% of its mortgage loans in 2014 were higher loan value loans. She estimated this year's volume was close to the same, but contained significantly more purchase money loans and fewer refinanced loans. Meriwest Mortgage Company is a wholly-owned subsidiary of the $1.1 billion, Santa Clara, Calif.-based, 70,000-member Meriwest Credit Union.
Like Patelco CU, Meriwest also required two appraisals for these properties and used the lower one to underwrite the loan, Domondon said. The company also required additional credit procedures for the borrowers, she said, stressing that it believed in underwriting both the borrower and the property.
Domondon said Meriwest had never particularly marketed its jumbo mortgage originations, but instead had remained focused on building its brand as the area's local lender – which in Santa Clara, Calif., means making higher value mortgage loans, she said.
Neither Meriwest nor Patelco CU had begun selling their jumbo loans yet, but both executives said their cooperatives had identified buyers should they want or need to sell them.