More financial institutions investing in jumbo loans
When lenders cut back on the number and type of loans offered after the financial crisis, subprime borrowers became out of luck when trying to get a mortgage. Now that the market is picking back up, banks and financial institutions are more willing to originate mortgages. But not just agency-backed mortgages, but jumbo loans as well.
Though many steered clear of jumbo loans after 2008, or loans too large to be backed by Fannie Mae and Freddie Mac, more banks are finding these to be a profitable source of lending, especially since they are often given to the most qualified borrowers. The number of jumbo mortgages has increased as a whole, and major banks such as Wells Fargo have increased the number of jumbo loans originated in the past three years, according to Reuters. Since interest rates are typically higher than traditional loans, more banks are looking into this form to increase profits.
Major banks – including JP Morgan and Wells Fargo – have stated that they plan on increasing the number of jumbo mortgages originated this year, and while it may not be at pre-crisis levels, is growing closer now that the market is gaining strength.
While these loans are typically made only to qualified borrowers – a major difference compared to before 2008 – huge loans can also lead to huge losses. Even with better standards, risk management software is often used to ensure that as the number of jumbo loans made increases, the profits do as well. For banks, investing in risk management tools can help prepare for non-agency mortgages, providing an extra layer of protection against unqualified borrowers and help the overall market continue on its recovery path.