Jumbo Loans Are Near 2008 Again

Originations of large jumbo loans that exceed the conforming limits set for Freddie Mac and Fannie Mae could hit a level this year that hasn’t been seen since the run up to the 2008 credit collapse, according to a weekly report from Bank of America.

Researchers tallied jumbo originations at $238 billion during the first half of 2021 and within striking distance of $550 billion for the year. A large share of the jumbos are held in bank portfolios, but a growing amount has been packaged and sold to investors in the mortgage market’s private-label sector, which lacks government guarantees.

Jumbo home loans mostly go to borrowers with prime credit scores who need financing above the conforming limit set out for housing giants Freddie Mac and Fannie Mae. That’s currently about $548,000 on single-family residences in much of the U.S., but closer to $820,000 per home in New York, San Francisco and other high-cost areas. Those levels can increase annually.

Several public mortgage lenders, including PennyMac, in recent weeks have said they would offer borrowers confirming loans of up to $625,000, a level that’s anticipated to match the new federal guidelines for 2022, which are expected to be announced in November.

The race to make large loans on expensive homes comes as property prices have surged during the pandemic, up almost 20% from a year ago, as of July, while touching fresh records in many cities across the nation.
Jumbo mortgage-bond issuance this year has already hit a post-2008 record of $38 billion, with $45 billion likely by year’s end, according to the BofA team, which noted an expanded investor base for private-label mortgage bonds, but also low credit losses and “strong” origination guidelines.

It has been about 15 years since Wall Street fueled a boom in high-leverage mortgages to risky borrowers and a suite of exotic, housing-related derivatives that imploded when home prices tumbled, taking down investment bank Lehman Brothers and prompting a wave of U.S. and European bank bailouts.
Since that time, big banks have been required by regulators to hold more capital against potential loan losses, but also briefly during the pandemic were temporarily prevented from buying back their own shares.

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