It has been a tough couple of years — almost the proverbial perfect storm — for Connecticut mortgage brokers handling jumbo loans.
The Great Recession has cut home prices and values, turning some jumbo loans upside down for borrowers. Falling values and tighter credit have made refinancing difficult and generating new loans even worse.
Low and no down payment and adjustable rate schemes are history.
The biggest mortgage players — quasi-government agencies Freddie Mac and Fannie Mae — increased conforming loan limits from $417,000 to $729,750, cutting more than $312,000 off the jumbo market that once was the sweet spot for brokers.
But there may be light at the end of the tunnel. Several Connecticut mortgage brokers say credit is loosening, interest rates are low again, new creative loan plans are emerging and pent-up demand for high-end housing is eager to enter the market.
“The jumbo mortgage market is at the beginning stages of a rebound,” said David Adamo, CEO of Stamford-based Luxury Mortgage Corp. “Jumbo mortgage rates are at historic lows and programs are becoming more readily available.”
“The high-end housing market will most certainly get a boost from the increased availability of jumbo mortgage product,” said Adamo.
In fact, the future looks so bright that many mortgage experts worry a new threat is emerging — big banks.
Their new interest in the jumbo could forever change the lending landscape and make mortgage brokers’ business even tougher.
“Any lender who historically is looking for good jumbo business now has less potential loans because many of the loans they would ordinarily purchase are now being bought by Fannie and Freddie,” said Paul Anastos, president of Mortgage Master Inc., a large independent lender based in Massachussets.
Mortgage Master — which has eight offices in Connecticut including Greater Hartford, Greenwich and Fairfield County — originated $5.5 billion in mortgages last year.
“The competition among banks related to jumbo business has increased substantially over the past six months,” said Anastos. “As a result, the banks have gotten more aggressive in trying to obtain a greater percentage of jumbo business.”
Tom Casey, a certified financial planner with Casey Thomas & Associates in Shelton, agrees.
“An interesting twist in the mortgage market today is that some lenders — Chase is one — are contacting their existing, well-qualified borrowers and offering to refinance their existing mortgage at a lower rate with little or no closing costs,” said Casey.
“Apparently, they feel that it is better to keep these clients on the books rather than let them go to a competitor,” said Casey.
Dental specialist David Sandak was surprised when Justin Carmichael at Luxury Mortgage Corp. informed him he would be able to refinance his $1.3 million colonial-style house in Weston and tap into the equity for an additional $90,000 so he could remodel his kitchen.
Sandak, a periodontist, refinanced his expensive adjustable-rate mortgage into a 10-year fixed mortgage at 4.875 percent.
In 2009, the average rate on a 30-year jumbo mortgage was 6.86 percent compared to 5.48 percent in July, the lowest since 2003. That represents a significant savings for borrowers, according to Casey.
For example, a homeowner with a 30-year fixed jumbo mortgage balance of $729,750 at 6.86 percent pays $4,786 a month. The same balance refinanced into a 5.48 percent loan reduces the monthly figure by $652.
“The jumbo mortgage market is alive and well for well-qualified borrowers, with well-qualified being the operative word,” said Casey.
Adamo is betting lower interest rates for jumbo loans will draw buyers back to Connecticut’s high-end housing market.
The cheaper rates also signal relief for wealthy homeowners looking to reduce expensive mortgages by refinancing, especially those whose exotic loans have reset, said Adamo.
In July, Adamo said applications for jumbo mortgages are up this year and Luxury Mortgage Corp., started in 1996, added 60-plus senior mortgage bankers to the company’s 125-employee firm.
Before the financial crisis hit in 2007, jumbo mortgages originated within the company averaged $1.5 million; as the market for mega-loans came to a halt three years ago and the demand for expensive mortgages dried up, that amount dropped to an average $500,000 per loan, said Adamo.
Interest-only jumbo loans and adjustable-rate mortgages (ARMs) used to buy high-end homes allowed wealthy borrowers to postpone making principle payments for three, five or seven years.
By 2007, many white-collar workers who planned to refinance their exotic mortgages before the expensive loans reset to higher rates started taking pay cuts or lost their jobs altogether.
Delinquencies on jumbo mortgages doubled in less than a year between 2008 and 2009 as the inventory of luxury homes shot up. At the same time, unemployment continued to rise while real estate values plunged.
That meant wealthy homeowners couldn’t refinance their option ARMs or interest-only loans into more stable, long-term accounts because their homes were underwater, that is worth less than the value of the mortgage.
It used to be that high-salary borrowers with excellent credit and ample cash reserves could ink a new multi-million dollar mortgage or refinance an existing loan on their posh digs with no questions asked.
Of course, that was before the economy tanked and the housing market went belly-up, making lenders skittish about financing any type of mortgage, especially since they had to hold the loans they made on their balance sheets.
The landscape shifted from one extreme to the other; now lenders require high-net borrowers to pony up as much as 40 or 50 percent for a down payment compared to only 20 percent a few years ago. Borrowers also much have good income, strong credit scores of 700 or better and sufficient financial reserves.
And creditworthy consumers are waiting longer to close their jumbo mortgages while banks pore over financial documents and complete due diligence.
“Borrowers face considerably more scrutiny than they did before the 2008 meltdown,” said Casey.
“Incomes and assets are verified. Loans to value ratios have not changed much,” said Casey. “But lower values have made it difficult for borrowers trying to refinance, particularly when they want to cash out and pay off their old home equity line from the new mortgage.”
