Borrowers are not the only ones missing out in the
current market. The unprecedented performance of
post-crisis jumbo-mortgage loans suggests there
are many more prudent mortgage-credit opportunities that originators, mortgage companies and
investors are missing out on.
An Urban Institute report from this past December — Housing Finance at a Glance: A Monthly Chart-book — includes some prescient insights about
where the market currently stands from a historical
perspective. Based on the report’s credit-availability
chart, if one were to assume the period from 2001
to 2004 represents a “normal” lending environment,
where lenders and mortgage investors were willing
to take reasonable amounts of credit risk, then it
is safe to say we are currently nowhere near a
normal market today.
Stifled jumbo market
Looking at post-crisis jumbo private-label securitizations to date shows how tight the standards
have become. At origination, the weighted-average
loan-to-value (LTV) of a jumbo loan is approximately
67 percent, the weighted-average FICO credit-report
score is approximately 768, and the weighted-average debt-to-income ratio is around 31 percent,
according to this past November’s Kroll Transaction
It’s more than obvious that people who fall just
below the current extremely high standard could
still be excellent borrowers. Yet there have not been
many options for these consumers and, if we are
being honest, nor has there been adequate interest
or motivation from the industry to serve them.
Although we are almost a decade removed from
the financial crisis, the wounds to the banking sector
are still fresh in the eyes of bank management and
regulators. Accounting and regulatory standards,
along with the extremely high costs associated with
servicing delinquent mortgage loans, have further
incentivized banks to lend to only the very best
In addition, because of both domestic and international post-crisis fiscal policies, bank balance sheets
have ballooned, leaving them with an insatiable
appetite for the asset classes they prefer, which includes super-prime jumbo loans. It is little wonder,
then, that big banks, with their large stores of deposits,
have come to dominate the prime jumbo market.
In fact, while the nation’s biggest banks are losing
their share of mortgage origination volume, they are
actually increasing their share of the jumbo market
by marketing to affluent borrowers with miniscule
risk of defaulting. Three banks — J.P. Morgan Chase,
Wells Fargo and Bank of America — accounted for
more than two-fifths of all jumbo-loan volume in
the first half of 2016. The result is smaller lenders and
investors are going head to head with competitors
that have a seemingly insurmountable advantage.
This scenario where big banks dominate the super-
prime jumbo market actually creates a significant
opportunity for smaller originators with the vision
to see these dynamics and to expand their jumbo
mortgage offerings. Rather than compete head to
head with banks in the super-prime segment of the
market — with limited margins and limited poten-
tial for expansion — small and mid-sized mortgage
companies would be better served by focusing on
mortgage products that fall just outside the realm
of what is being offered by big banks.
One of the most obvious products originators
can leverage is expanded-credit jumbo-mortgage
loans. Many prudent mortgage loans can be made
to borrowers with credit attributes outside of the
restrictive statistics noted earlier.
Consider high-earning borrowers with FICO scores
in the high 600s, for example. Perhaps a disputed
medical bill has taken a borrower’s score down a
notch. Other borrowers might be carrying a lot
of credit because they run a business or are self-employed. These borrowers often have more than
sufficient income to make mortgage payments,
typically pay their debts on time and have considerable savings.
By the sum of these factors, a prudent originator
would look at such borrowers as a “safe” lending
risk. There is no good reason why they should be
left sitting on the sidelines. Nor should prudent
borrowers be forced to sacrifice their hard-earned
savings or unnecessarily delay a home purchase to
come up with a 20 percent downpayment because
they live in San Francisco — or another area with
limited or no affordable-housing options.
Matthew J. Tomiak is managing director of Redwood Trust Inc., the largest
post-crisis issuer of jumbo private-label mortgage-backed securities. Prior
to joining Redwood, Tomiak served as a senior vice president at Bank of
America, where he focused on mortgage liquidity and financing alternatives.
Tomiak began his career as an attorney and holds a Bachelor of Science in
business administration from the University of Richmond and a Juris Doctor from the Duke
University School of Law. Reach him at email@example.com.
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