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Banks Take on Weighted Risk for Heavy Lending

by James F. McClister

Looking for a good mortgage rate? All you need is good credit and a lot of money.

In recent years, expectant homebuyers vying for a good mortgage rate have faced dire odds as once loose lending standards continue tightening drastically. It’s been a tough road – for many, one too tough to travel.

But it’s not all doom and gloom. For one group, a good mortgage rate is only one trip to the bank away. How do you join? Easy, just have money.

In the years immediately following the 2007 economic downturn, the share of homes selling for at least $1 million dropped drastically, as did the rest of the market. However, in recent years, the luxury market has recovered at an impressive rate, and, in many ways, has outpaced the wider, lower-tier market.

It’s a collage of factors driving this particular sector’s development, such as personal means and builders chasing more lucrative projects, as we reported, but among the most surprising is the role lenders have played. For the first time in recent memory, according to The Washington Post, mortgage originators are offering jumbo mortgages at the same or better rates as smaller loans, which is another way of saying, it’s easier for the wealthy to get a low interest rate.

This year alone, the National Association of Realtors confirmed that the number of homes sold for $1 million or more climbed 8 percent. A significant gain considering those at every other price point combined fell 4 percent.

Steering New Construction

In September, we reported that national inventory is no longer in favor of first-time homebuyers, or even the lower middle class, for that matter. In the last year, inventory for homes priced $227,500 and below have dropped 15.7 percent while homes priced $549,800 and above have risen 15.6 percent. The reason? New construction is being dominated by wealthy buyers.

Developers aren’t taking the same gambles they did in 2006, and are instead looking for the wealthier and more secure offer, which is not unlike the approach lenders are taking.

Banks have a rich memory of the housing crisis, particularly of the reckless loans that were being bandied about, so it should come as no surprise their decision to issue safer loans, which, in this case, means larger to more wealthy buyers.

“Many people are finding out by accident that they can often get a better rate on a $700,000 mortgage, than a $400,000 mortgage,” Guy Cecala, publisher of Inside Mortgage Finance, told the Post. “The opportunities for wealthier borrowers are now better than they’ve been in a decade as far as rates and terms.”

Banks Careful About Taking On Additional Risk

In the first three quarters of 2014, overall mortgage lending by dollar amount fell a substantial 44 percent compared with 2013, according to Inside Mortgage Financing, and it’s in large part to a dwindling interest in the multi-year refinancing that was once so popular. In order to make up the lost volume, banks have turned to the wealthy.

As of recently, IMF confirmed, jumbo lending makes up 20 percent of all home purchase loans in terms of dollar volume, a considerable stake. David Stevens, chief executive of the Mortgage Bankers Association, revealed to the WSJ that “banks are much more comfortable in the wealth market,” explaining why lenders are willing to take on greater risk to give lower rates to more affluent borrowers.

That’s right; banks are willing to take on greater risk if it means bringing on a wealthier buyer – with good credit, of course. Instead of having Fannie and Freddie pick up and insure their loans, banks that are lending to wealthy buyers are opting to hang on to mortgages. In the event of delinquencies or foreclosures, the bank will bear the brunt of the hit, but it also allows them to issue larger and jumbo loans at cheaper rates and with more flexible terms. In early November, the average rate on a 30-year, fixed rate mortgage of $417,000 or less was 4.17 percent, while loans of a higher amount were only 4.13 percent, according to the MBA.

Still, lenders aren’t necessarily throwing caution to the wind for a chance at a few extra bucks. In order to get the best rates, wealthy borrowers need to come in with a hefty down payment, Todd Wood, founder of CastleWood Builders in Bethesda, Md., told the Post, adding that it’s not unusual for buyers to put up to 50 percent down on a home.

“But even if you put down 50 percent,” he added, “you’re not going to get the best rates or the most favorable terms if you don’t have a good credit score.”

He says he’s seen wealthy buyers with a solid down payment have their financing turned down because of bad credit, which isn’t realty that surprising, considering the risk lenders are taking on by holding on to the mortgage in the first place.

As 2014 ends and we move into the New Year, expect wealthy buyers to continue dictating the pace of the market, and especially new construction. But with new mortgage rules aimed at coaxing first-time and middle class buyers back into the market, as well as the surge of Millennials expected to enter the market within the next year, it wouldn’t be surprising if rates shifted in favor of the little guy later in 2015.

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