Americans from San Francisco to Boston are taking out a record number of mortgages in excess of $1 million while stiff lending standards crimp total loan volume. They are borrowing while mortgage rates are still low rather than liquidate their investments amid a stock market gain of 7 percent this year.
The number of loans from $1 million to $10 million to buy single-family homes in the 100 largest metropolitan areas surged to more than 15,000 in the second quarter, the highest ever, according to property data firm CoreLogic.
At the same time, banks are restricting home loans to first-time buyers who don't have high credit scores. In June, about 28 percent of total existing-home sales involved new buyers compared with an average of 35 percent since October 2008, according to the National Association of Realtors.
Jumbos, or loans of at least $417,000 in most areas, exceed the limit for government-controlled Fannie Mae and Freddie Mac to guarantee. The mortgages are made to the most creditworthy borrowers and are generally held by banks instead of being packaged into securities and sold to investors.
In Southern California, millionaires are boosting demand for the largest loans because of an improving economy and brisk sales of luxury homes gives them confidence in the market, said Mark Cohen, a mortgage broker at lender Cohen Financial Group in Beverly Hills. Cohen, whose average loan has increased to $1 million from $800,000 this year, said he gave a $9.9 million mortgage recently to an executive at a publicly traded company in Brentwood, a neighborhood in Los Angeles where former California Gov. Arnold Schwarzenegger, R, has lived.
Sales of homes costing at least $2 million in 30 of the biggest metropolitan areas during the first half of this year rose to the highest since at least 2006, according to CoreLogic. Sales of existing homes of $1 million and more increased 8.5 percent in June compared with a year ago, the biggest jump among all price ranges, data from the National Association of Realtors show.
Some borrowers are reluctant to sell part of their portfolios to pay cash for a home as the stock market reaches new highs, said Jim Francis, head of consumer lending at MUFG Union Bank, N.A., a subsidiary of Mitsubishi UFJ Financial Group. Many of the bank's clients are business owners who would rather put money into their firms instead of using it to pay for a house, he said.
Union Bank originated more than 350 loans of at least $2 million this year, said Francis. Its average loan size is about $900,000.
Interest rates are also driving demand, with borrowers getting mortgages at less than 3.5 percent and expecting rates to rise in coming months. Some customers are opting for the seven-year adjustable-rate mortgage, which as of yesterday was offered at 3.15 percent, over the five-year loan, said BNY Mellon's Gorman.
Loan requests at BNY Mellon for at least $2 million increased 30 percent this year compared with 2013. The average mortgage increased to $1.1 million from $1 million last year, and clients generally put down about 30 percent, Gorman said.
"There is the mentality that rates are moving up," said Gorman, whose largest loan this year was $7 million for the refinance of a second home in California.
BNP Paribas SA's Bank of the West is granting jumbo loans to customers with fluctuating income by including other assets in its calculations. In complying with the Dodd-Frank legislation's ability to repay requirement, the bank considers assets in retirement accounts and other investments rather than just income, said Cyndee Kendall, a regional sales manager for Northern California. That's helped the bank grant large loans to self-employed borrowers.
"Those who are buying in the super-jumbo space often have more complex financial situations," said Kendall, whose bank received 20 percent more jumbo loan applications in the second quarter compared with the prior year. "There are a lot of affluent borrowers with assets who may not have stable income. We still feel comfortable you can justify having the ability to repay by going into the next layers."
Some wealthy homebuyers still prefer to use cash rather than provide lenders with documentation of their assets, said David DeSantis, a Washington-based partner and managing broker at Sotheby's International Realty. Others avoid mortgages because they don't want to lose a bidding war to all-cash buyers, said Elyse Arbour, a real estate agent with Rodeo Realty in Brentwood.
All-cash sales made up 32 percent of existing home transactions in June compared with 31 percent a year ago, according to data from the National Association of Realtors.