twentyWhy JPMorgan and Bank of America Relaxed ‘Jumbo Mortgage’ Rules

 

This a www.thestreet.com article.

 

NEW YORK (TheStreet) – JPMorgan Chase (JPMGet Report)  is lowering its credit standards for high-value mortgages, seeking to attract new customers as a looming Fed interest-rate hike dims the luster of home-loan refinancing.

The bank dropped its minimum credit score for would-be homeowners to 680 from 740 on “jumbo” mortgages, which are for homes typically worth more than $417,000. It’s also cutting the required down payment to 15 percent from 20 percent of the purchase price.

The change follows similar reductions at Wells Fargo (WFCGet Report) and Bank of America (BACGet Report) , which have been spurred on by soaring sales volumes and major growth within the sector. Jumbo mortgage sales rose to $163 billion in the first half of 2015, a 58.3 percent gain from a year earlier, and mortgage sales overall gained 53.3 percent, according to Guy Cecala, publisher of the research journal Inside Mortgage Finance.

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While mortgage revenue is high and memories of the 2008 housing crisis are fading fast, the sources of that revenue are in flux. They’re shifting from lucrative refinancing products — which are attractive when interest rates are lower than what buyers were able to get on their original loans– and back toward first-time mortgages from new buyers.

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“These companies are worried about market share because their refinancing deals are going out the window,” said Chris Wheeler, bank researcher at Atlantic Equities in London. “Everyone is expecting refinancing to fall off.”

Refinancing accounted for 45% of Wells Fargo’s applications in the second quarter, down from 61% in the previous quarter, according to the bank’s earnings statement.

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From 2013 to 2014, the total volume of U.S. mortgages from refinancing dropped by 18 percentage points, with the loss more than made up in new mortgages, according to data from the Securities Industry and Financial Markets Association and the U.S. Census Bureau.

Analysts read the new credit standards as a way to exploit the trend toward new mortgages.

“There is definitely a push right now toward increasing market share,” said Jennifer Thompson, a managing director at Portales Partners in New York. “That means extending these offers to anyone who is eligible.”

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The falling popularity of refinancing, which is at its lowest levels relative to new purchases since 2000, is due in part to prolonged low interest rates, which are expected to rise later this year. Once they start to come up, possibly as early as September, refinancing will make less sense for homeowners.

It’s also due to the saturation of the refinancing market in general.

“The main reason for the rebalance is that we’ve just run out of people to refinance,” Cecala said in a phone interview. “At some point, we just need to bring new people into the market.”

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Some analysts view the new credit standards, however, as a natural consequence of a slowly improving domestic economy.

“We’re in that part of the cycle,” said bank analyst Marty Mosby of Vining Sparks. “Everything besides residential real estate has gone back to pre-2008 levels, so this is much more par for the course.”

“The industry is relaxing overly conservative standards,” he added.

Despite steady gains in the U.S. economy and positive housing numbers, slackened credentialing standards still remind critics of the predatory lending habits that contributed to the housing bubble of the mid-2000s. Its eventually collapse precipitated the global financial crisis of 2008, along with waves of lawsuits over home mortgages.

“The fear of litigation is diminishing,” said Atlantic’s Wheeler, “but it’s still there.”

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