Wells Fargo just announced an increase in the required banking and/or investment relationship for jumbo loans from $250,000 to $1,000,000. Additionally they increased the restrictiveness of some of the loan approval guidelines. Back in April, Chase made similar moves to their lending rules and requirements. This trend is not limited to the big banks and many regional players have required greater non-mortgage relationships for loan consideration and the loans offered had tougher loan approval guidelines. The main reason is risk and reward.
As we face uncertain times, the risk of these non-standard loans increases. Not only are they larger loans with more exposure for the institution, they are also loans for which there is a much smaller secondary market. This means that they cannot be sold the way that loans adhering to Fannie Mae, Freddie Mac and Ginnie Mae can be. Many times these loans need to kept on the institutions balance sheet and these portfolio loans directly impact the bottom line if they go bad. When they are using their own checkbook, institutions get more conservative.
For this risk, they expect more reward. Anyone applying for a jumbo or non-conforming loans should undoubtedly expect greater rate and cost, but for banks in today’s environment, that it not enough. Institutions no want to make sure that they are not putting a client’s debt on their balance sheet without the benefit of holding their assets. Banks want to make as much profit as possible from these clients, many of whom are high or ultra-high net worth by maximizing their wallet share and deepening the relationship. These assets also provide proof of reserves for the client’s debt load further reducing their concerns of a default.
This drastically changes the loan application process for home shoppers and homeowners looking to buy or refinance. Choices, in short, will be fewer and borrowers may be limited to the institution holding their banking/investment relationship. If the bank with whom they have a relationship cannot meet their lending needs, these borrowers must be open to moving their assets to gain access to the lending programs that they need or risk not being able to get a loan.
Divorcing clients, a large part of my business, will definitely face new headwinds. In divorce, there is commonly the need to find unique or creative financing. While some great options were commonly available, these options are now considerably less available. For those affluent divorcing couples with significant enough assets to warrant consideration for non-standard lending, there will still be good options. As many of these individuals move their money as part of a new start anyhow, this may not be too much of an issue and sometimes new relationships bring other perks. Less wealthy borrowers or those that have seen significant asset depletion due to their divorce may be out of luck for the time being.
Whether divorcing or just getting a loan, jumbo and non-standard borrowers need to plan ahead, build a strategy and deliberately execute that strategy. More importantly, they need to have realistic expectations. For many years, borrowers have had the luxury of being in the driver’s seat and institutions were eager to get their business. Now the reward needs to justify the risk or they will take a pass.