Banks are handing out mortgages of as much as $10 million to the wealthy in record numbers while first-time homebuyers struggle to get loans.
Erin Gorman, managing director at Bank of New York Mellon, said she's fielding more requests for home loans of at least $2 million than ever before. She recently provided a mortgage of more than $6 million for a client's purchase of a second property in Colorado.
"These high-net-worth borrowers do act differently than first-time buyers, who borrow because they have to," said Gorman, who serves as the national mortgage sales director. "High-net-worth borrowers don't have to borrow. They choose to, so they're very strategic about what, why, and when they borrow."
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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 per cent 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 per cent of total existing-home sales involved new buyers compared with an average of 35 per cent 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 neighbourhood in Los Angeles where former California Governor Arnold Schwarzenegger 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 per cent 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, 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 per cent 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 per cent, over the five-year loan, said BNY Mellon's Gorman.
Loan requests at BNY Mellon for at least $2 million increased 30 per cent 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 per cent, 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 per cent 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 per cent of existing home transactions in June compared with 31 per cent a year ago, according to data from the National Association of Realtors.
Lenders are luring wealthy borrowers to try to build long-term relationships as total home lending slumps amid higher credit standards. Originations are forecast to drop to $267 billion for the three months ended June 30, which would be the lowest in 17 years for the second quarter, according to the Mortgage Bankers Association.
"It's important to us because mortgages are very often how we meet a client," said Katherine August-deWilde, president of First Republic Bank, a jumbo lender with locations in California, Oregon, Connecticut, Florida and other states. "We generally address pricing if you have a large relationship."
A Bank of the West wealth management client who takes out a $1.5 million loan and keeps $750,000 in a wealth management account is eligible to get half a point off the usual cost for an adjustable-rate mortgage, Bank of the West's Kendall said.
Customers who have relationships with banks may get access to loan deals that aren't advertised, such as borrowing against inherited investment assets rather than income, Sotheby's DeSantis said.
At BNY Mellon, more clients have been choosing a hybrid loan, which enables them to use two mortgages and get an overall lower blended rate, according to Gorman. Union Bank, Bank of the West and other lenders said they don't have set maximum amounts for mortgages and will consider any request.
Cohen, the Beverly Hills broker, said some of his million-dollar plus borrowers end up paying off their loans before the ARM-term expires.
"These mortgages have a short shelf life," Cohen said. "That's just the mentality -- move within five years."