Wells Seeking Larger Share of Jumbo Market

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 conforming alternative.    

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 cities.

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.