According to a report published in TheStreet on Tuesday, Moody's Investors Service, a wing of Moody's Corp. (MCO), has said that many U.S. banks, which produce jumbo mortgage loans and have the power to independently sell these, could enjoy higher earnings as government sponsored enterprises (GSEs), Fannie Mae (FNMA) and Freddie Mac (FMCC) are gradually moving away from the jumbo loan market. These banks will pick up market share from loan producers depending heavily on GSEs to sell their loans.
What is Jumbo Mortgage Loan?
This is basically a mortgage loan that exceeds the purchasing limits set by the GSEs. As a jumbo mortgage loan does not conform to a regular mortgage loan in structure, it is deemed unconventional. One easy example under this category would be a loan to buy an astronomically priced luxury apartment.
Though the return on jumbo mortgages is higher than ordinary mortgage loans due to their higher average interest rates, the risk is also high for lenders. If a jumbo mortgage loan defaults,selling the concerned property at its full price to recover the loan amount would become difficult.
The GSEspurchase a bulk of U.S. jumbo mortgage loans from the lenders, allowing them the scope to concentrate more on conforming loans. This primarily reduces private lenders’ risks related to the repayment of jumbo loans. However, often the big size of such loans restricts the GSEs to buy them entirely. As a result, lenders hold these higher balance loans in their balance sheets.
Banks that May Gain
Going by Moody's list, the large jumbo loan producers poised to benefit include Wells Fargo (WFC) with $14.45 billion, Bank of America (BAC) with $12.43 billion, JPMorgan Chase (JPM) with $10.2 billion and Citigroup (C) with $6.70 billion in such loans.
How Will These Banks Gain?
The rating agency expects conforming loan limits of the GSEs to decline in September. This will provide banks the room to enter the market and profit by selling their mortgages directly. Though they will have to take a greater risk for selling jumbo loans directly, the return will also be high.
According to Thuy Nguyen, a Moody's analyst, banks will have to fund only about $28 billion additional jumbo loan following the decline in conforming loan limits by GSEs. This will increase each bank's jumbo mortgage portfolio by 32%.
Is it a Boon or Bane for U.S.?
Not only banks; considering the scope in the jumbo loan market, many other financial institutions such as private equity, REITs and hedge funds are trying to grab opportunities in the jumbo loan market.
Will this lead U.S. to another housing bubble? That’s the primary concern at this point. With several private lenders entering the market, the jumbo loan offering will increase significantly, inciting borrowers to spend more than that they can afford. Finally, the defaults on these jumbo loans will take place in cyclical manner, pushing the economy back to recessionary state.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
FREDDIE MAC (FMCC): Free Stock Analysis Report
FANNIE MAE (FNMA): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
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