We had an appraisal come in low last week, and the agents seemed to believe that our choice of “jumbo investor” (PenFed) had something to do with the low appraisal when that was not the case.
Because the agents were smart and very seasoned, it occurred to me that I should explain the nature of jumbo lending in the mortgage banking world.
What Are Jumbo Loans?
Simply stated, jumbo loans are mortgages that exceed “Conforming Limits:” $647,200 in low-cost areas (like Texas) and $970,800 in high-cost areas (like most of coastal California).
What Are “Investors?”
Investors are entities (often other large banks, credit unions, or funds) that buy mortgages from mortgage banks right after they fund.
This is once again how mortgage banks make money; they sell loans they fund with their warehouse lines to investors for a premium, e.g. they fund a $1 million loan and then sell it to Wells Fargo for $1,010,000 – and make $10,000.
Who Are Investors?
Here is a list of just a few of the jumbo investors our mortgage bank sells to: Wells Fargo; CIT; Bayview Acquisitions; Redwood Trust; JPMorgan Chase; PenFed; Alliant; Alliance; and TIAA
Maintaining a strong list of jumbo investors is a key competitive edge for every mortgage bank, and it is a primary reason why we aligned with our current mortgage bank – because we need very competitive jumbo financing options in our markets.
Why Do We Choose One Investor Over Another?
With “Conforming Loans,” most mortgage banks usually do not target a specific investor when they underwrite a mortgage.
Many lenders simply underwrite to “Conforming Guidelines” and then sell to Fannie Mae, Freddie Mac or to one of many investors who will bid for conforming loans (I am oversimplifying a bit).
This is not the case for jumbo loans because guidelines are much more specific and stringent.
Every jumbo investor has specific requirements for such things as: 1) Minimum tradelines on a credit report; 2) Minimum credit scores; 3) Liquid reserves held after closing; 4) Debt ratios; and 5) Down payment.
These requirements are usually far more strict than conforming loan requirements, and some investors are far stricter than others.
For example, we targeted the buyer I mention in the first paragraph of this blog to PenFed because he lacked the necessary reserves (12 months now) and tradelines (4) to go to a slightly more competitive investor.
We always target whatever investor offers the absolute best terms our borrowers qualify for.
We would never go to an investor just because we “like” them or because we think it might require less effort.
Once we do target a specific investor, we lock in our borrower’s rate with that investor and then underwrite the loan with the definite intention of selling to that investor.
A few jumbo investors require some mortgage banks to use their specific appraisers, and that is probably why the agents I mention above believed that our appraisal issue was investor-specific.
But, with our current mortgage bank, I am not aware of any jumbo investors that require us to use their appraisers or appraisal pool.
Hence, no matter which investor we target, we can use our own pool of appraisers and our appraisals are transferrable to any jumbo investor we target.
No Waivers; Appraisal Reviews
Almost all jumbo investors have more stringent appraisal requirements as well.
This means that we never see “Appraisal Waivers” like we see very often now with conforming loans, and most of our jumbo appraisals are subject to reviews of some sort.
These reviews sometimes come in low when they are done only at the desktop level (with no field inspection) because the review software and/or reviewers are sometimes unable to account for specific nuances, e.g. a great view, quiet setting, etc., that make a property worth more.
There are workarounds (such as ordering a 2nd appraisal in lieu of a desk review), but suffice it to say that appraisal reviews are a major cause of delays and appraisal cuts when it comes to jumbo financing.
NOTE: This blog explains why jumbo rates are so much lower than conforming rates now.
Founder/Broker | JVM Lending
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