With low inventories and mortgages tougher to obtain this year, the housing market remains stuck in second gear.
While applications for mortgages of less than $150,000 dropped by 21% in March, requests for jumbo loans in amounts surpassing $700,000 grew by nearly 5%. At the other end of the spectrum, subprime loans are becoming more common, as well.
Oversized loans for the extra-wealthy
Even as banks trim their mortgage divisions amid a drop in refinancing activity, institutions like Bank of America, JPMorgan and Wells Fargo are courting well-heeled clients in their private bank sections.
Jumbo loans, which are written for amounts of $417,000 and higher, are not backed by Fannie Mae or Freddie Mac. Since banks usually keep these loans on their own books, they often offer these loans at lower interest rates than 30-year conforming loans.
In addition, some of these loans are interest only, at least for the first five or 10 years of a 30-year term. As Bank of America explains on its website, however, those initial low payments are not paying down equity. Union Bank offers adjustable-rate interest-only jumbo loans, as well – which means that those borrowers will likely face a much higher interest rate when they begin paying back principal in addition to interest.
Subprime lending on the rise
At the other end of the mortgage spectrum lies subprime mortgage lending, the fuel that fed the fires of the housing meltdown not so long ago. As banks look to expand their increasingly shrinking mortgage business, lending to those with previously untouchable credit scores is becoming more fashionable.
Earlier this year, Wells Fargo began considering loans to customers with scores below 640, traditionally regarded as the fine line between prime and subprime. Officially, the bank lowered its minimum score requirement recently from 660 to 620. Wells will also begin increasing loan-to-value ratios, which will decrease the amount borrowers must put down on a property in order to secure a mortgage.
Subprime has been quietly resurfacing for some time, representing 7.21% of mortgage originations in the fourth quarter of 2013, up from 4.98% just one year prior. While that percentage may seem low, TransUnion notes that subprime made up 15.97% of originations in the last quarter of 2007.
Are banks asking for trouble?
With much of the mortgage market opting out, it's easy to see why these two contingents are being courted so arduously. Since tougher mortgage rules became law this year, many prospective home buyers have been pushed out of the market – increasing the likelihood that subprime will continue to increase its market share this year, too.
So far, Wells is the only big bank to have lowered lending standards, and it notes that the type of subprime lending it is now offering is not the no-documentation mortgage of yesteryear. As for jumbos, those loans also went south quickly during the crisis, as tanking home prices prompted the wealthy to walk away from the debt. However, rising home prices have given lenders hope that the scenario will not repeat itself again.
With the enormous hole right in the middle of the mortgage market, there is little doubt that banks will continue chasing these kind of loans. So far, problems are few, and TransUnion recently reported that mortgage delinquencies have dropped to the lowest level since the second quarter of 2008 – due, in part, to "conservatism in underwriting new mortgages".
Let's hope that particular trend continues.
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