After the financial crisis, the jumbo loan market nearly dried up as financial institutions were hesitant to originate loans that were not backed by the federal government. However, with the combination of rising home prices and increased consumer and lender confidence, the jumbo loan market is, as the Wall Street Journal says, making a comeback.
Not only are more lenders willing to service these loans, but many financial institutions are increasing the loan-to-value ratio. This allows borrowers to take on a bigger portion of the loan than in the past few years, with some moving from 70 percent to 80 or 90 percent. Additionally, with a smaller gap in interest rates between conforming and jumbo loans, there is more of an incentive for borrowers to choose a non-conforming loan than times when the gap is larger.
The reason so many banks are easing their standards, the Journal explained, is because more are hoping to improve their relationships with affluent borrowers, as well as build their balance sheets by offering jumbo loans.
While this trend is expected to help improve the market with an increase in lending, it's also important for banks that are increasing the number of non-conforming loans to remain careful about the quality of borrowers, as lending with too low of standards could offset the economic improvements increased lending is expected to make. With risk management software, banks that are moving to jumbo loans can ensure that borrowers are qualified to take on the loans, which can help financial institutions stay profitable.
