As the virus took hold, banks stayed away from jumbo lending. But we are seeing positive activity now. (Pixabay)

Jumbo loans, a favorite tool of lenders to finance high-end homes for wealthy buyers, sank like a stone as the coronavirus began to impact the economy from March. But there are signs that jumbo loans are starting to rebound.

Lenders avoided these loans because a disproportionate number entered into forbearance agreements – 11.8%, compared to just 8.7% for all mortgages, reported the Wall Street Journal. Jumbos, which are not eligible for federal guarantees, exceed limits set by the Federal Housing Finance Agency and are typically used to finance more expensive home purchases.

As of 2015, the rates of these mortgages have been lower than those of conventional mortgages due to the belief that they present a lower risk due to the profile of the buyer, according to the Mortgage Bankers Association. But as the coronavirus shook the world, the dynamic between jumbo loans and conventional mortgages has also reversed. Since February, Jumbo loan rates have averaged 210 basis points higher than conventional mortgage rates. And potential borrowers with plentiful savings and sterling credit have been turned away by their banks.

Lenders, including Wells Fargo, have stopped buying jumbo loans from other originators entirely, and other banks, including Wells Fargo, Bank of America, Chase and TIAA Bank, have tightened their lending standards.

As home orders shrink and the market picks up, the gap between jumbo loans and conventional mortgages has narrowed. In June, conventional mortgage rates were on average 3.3%, while the jumbo is still a little higher, at 3.5%.

Still, the signs of a rebound are there. Guaranteed Rate, a large non-bank lender, said it took out twice as many jumbo loans between May and June as it did between April and May, according to the Journal. And a few major bank lenders have said they plan to ease lending standards as the economy rebounds, though it’s unclear when that will happen. [WSJ] – Georgia Kromrei


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