It's no secret that big banks view cheap jumbo mortgages as 'loss leaders' to bring
in new banking and wealth management business. Given Wells Fargo's 25% increase
in wealth management profits in Q2, it's working. And now Wells would like it to work some more.
Reuters is reporting that Wells Fargo, the largest
U.S. mortgage bank, is relaxing its lending standards for some jumbo loans, generally
classified as exceeding the $417,000 conforming loan limit set for Fannie Mae
or Freddie Mac (the GSEs), and FHA loans.
The bank is doing so, news reports say, in an attempt to reverse the
steadily declining rate of mortgage originations.
Loans that do not meet conforming limits are not
eligible for government guarantees and have historically carried a higher
interest rate. That has ceased to be
true in the last few years however and the average jumbo rate reported for a 30
year fixed rate mortgage this morning was 7 basis points below that of its
Last month the bank lowered the minimum credit score
for its fixed-rate jumbo mortgages to 700 from 720. Now it has announced it is easing standards
on jumbo loans it buys from other lenders (meaning today's announcement doesn't apply to retail branches).
Now eligible for purchase are loans that were used to purchase second
homes and loans used for refinancing where the borrower has cashed out equity by
taking a larger loan than the one it replaced.
Wells and other banks have been looking at a
steadily diminishing level of mortgage originations since rates began to rise a
year ago. The Mortgage Bankers
Association's (MBA) Market Composite Index, a measure of mortgage application
volume, has fallen for 27 of the 43 weeks since the beginning of the third
quarter of 2013 and its Purchase Index has been lower than the same week a year
earlier in all but one week, the one affected by the Thanksgiving holiday. The second quarter of 2014 alone saw a drop
of 50 percent in loan volume compared to a year earlier MBA said. Reuters says that Wells Fargo's drop has been
even steeper, down 58 percent during the same period.
At the same time rising home prices have increased
the share of home purchasers who require jumbo mortgages. This is especially true in San
Francisco-based Wells Fargo's home territory, but also in many other large
Wells Fargo is not alone is seeking to boost
mortgage volumes. MBA said this week
that one factor in the rise of its index measuring access to credit was the introduction
of new jumbo products last month, largely hybrid adjustable rate mortgages. Also, the Federal Reserve noted that 24
percent of the banks responding to its quarterly Senior Loan Officers Survey
reported that they had "somewhat" eased lending requirements for prime
residential mortgages over the last three months although there was no
distinction made between conforming and jumbo varieties. In the same survey
over 50 percent of responding lenders said demand for prime mortgages was
higher by some degree than three months earlier.
Still, that banks are loosening standards doesn't
necessarily mean it is easier for everyone to get a loan. Restrictions on credit scores remain tight,
especially where there is no government backstop, and debt-to-income ratios
have barely budged in recent years. The
Federal Reserve survey shows little appetite for banks to return to subprime
lending; only four of the 71 banks responding to the survey said they do any of
that type of origination.
Reuters quotes Wells Fargo executives as saying its steps to
expand access to mortgage credit are low risk as all borrowers must demonstrate
and ability to repay. The bank also apparently
sees cross-selling advantages to increasing its share of the jumbo market, even
if purchasing the loans. The private banking section of its website is
all about mortgages, citing the size it will lend (up to $6 million, $3 million
for cash out refis) and the client centered focus of its lending; a single
dedicated point of contact to underwrite and manage the loan, appointment of a
wealth management relationship manager and a dedicated post-closing customer
service line. There are also perks such
as interest rate protection during construction, financing for the self-employed
and others with "unique" income situations, and one-of-a-kind mortgage products
and pricing discounts if you become a Wealth Management client.