“In 2014, the number of mortgages to blacks and Hispanics combined was down 52% from 2007 across all bank and nonbank lenders, compared with a 37% drop for other racial groups combined. Among all approved mortgage applicants from the 10 (largest) banks, 5.3% were black in 2014, down from 7.8% in 2007; 7.4% were Hispanic, down from 10.6%…
…At J.P. Morgan, America’s largest bank by assets, jumbos were 22.5% of mortgages approved in 2014, up from 9.1% in 2007, the Journal analysis found. Its mortgages to blacks fell to 3.8% from 8.2% and to Hispanics fell to 8.7% (in 2014) from 15.1% (in 2007). A bank spokeswoman declined to comment. Bank of America bought Merrill Lynch during the crisis, which it said gave it a new wealthy clientele qualified for jumbos. Its jumbo lending rose to 15.6% of approved mortgages in 2014 from 8.0% in 2007. Its mortgages to Hispanic borrowers fell to 8.6% from 14.9% of its total, while black borrowers fell to 5.9% from 9.8%. The Department of Housing and Urban Development is looking into mortgage-lending declines to some minorities, said Bryan Greene, HUD General Deputy Assistant Secretary for Fair Housing and Equal Opportunity, declining to specify whether it was examining specific lenders or products. A number of the federal agencies overseeing fair lending have said there isn’t necessarily a conflict between fair-lending requirements and new mortgage regulations or jumbo lending. Regulators have fined two smaller banks, one focused on jumbos, in the past nine months for not lending enough to blacks and Hispanics. Prosecutors have said they are developing other cases.”, Rachel Louise Ensign, Paul Overberg and AnnaMaria Andriotis, “Banks’ Embrace of Jumbo Mortgages Means Fewer Loans for Blacks, Hispanics”, The Wall Street Journal, June 2, 2016
“Could it be any clearer that our federal government is the instigator and enforcer of reducing mortgage underwriting credit standards, in its well-intended (but likely misguided) efforts to expand homeownership to minorities and poorer Americans? They did it for decades pre-crisis and now just a few years post-crisis, seeing the actual results of “responsible mortgage lending”…a dramatic increase in mortgage lending to rich (jumbo) Americans and dramatic reductions in mortgage lending to minorities…they don’t like it and are going to pressure the banks and other mortgage lenders to once again reduce their mortgage lending standards. That’s fine, but then don’t blame the banks/mortgage lenders when defaults increase dramatically some day in the future. By the way, in the early 2000’s, for a few years I sat on Fannie Mae’s advisory board, and I can remember distinctly its Chairman and CEO at the time Frank Raines saying roughly the following: “This is an industry, where the model was 99% success and 1% failure/default. What’s wrong with a 95% success rate, if we can dramatically expand homeownership?” We all thought that sounded great at the time…good for everyone…and for a long-time this expanded credit risk was masked by the housing bubble, but the reality is 95% success, also meant 5% failures…and no one realized that that was a five-fold increase in defaults!!! And maybe an even greater increase in defaults in certain poorer and/or minority communities….But, clearly this idea came from well-intended government distortions of free, fair, and rational markets.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Banks’ Embrace of Jumbo Mortgages Means Fewer Loans for Blacks, Hispanics
High-dollar home loans place lenders between two postcrisis regulatory mandates: Take fewer risks and lend to a racially diverse pool
South Carolina real-estate broker Corwyn Melette said big banks are approving fewer applications from his customers, mostly African-Americans, who don’t need jumbo loans and are often turning to nonbank lenders. PHOTO: LANDON NEIL PHILLIPS FOR THE WALL STREET JOURNAL
By Rachel Louise Ensign, Paul Overberg and AnnaMaria Andriotis
Last decade’s financial crisis left many losers in banking. One winner is the jumbo.
The biggest U.S. banks are tilting toward these high-dollar mortgages as they overhaul loan operations. And jumbo loans, which were less important during the subprime-loan boom, are helping banks take on less risk, as mandated by regulators in the postcrisis era.
These loans, however, could put banks at odds with another federal regulatory mandate—one that says lenders should serve a racially diverse set of customers. As they approve relatively more jumbos, major banks are granting fewer mortgages to African-Americans and Hispanics than just before the crisis, a Wall Street Journal analysis found.
For banks, “it’s one of those damned if you do, damned if you don’t situations,” said Stu Feldstein, president at SMR Research Corp., a mortgage-research firm in Hackettstown, N.J.
The Journal analyzed data on every mortgage approval reported to the federal government for home purchases in 2007 and 2014, the most recent available, including borrower race or ethnicity. In that period, each of the 10 biggest U.S. retail banks increased the share of its mortgage approvals that are jumbos.
Jumbos, loans above $417,000 in most markets, are attractive because they typically feature high credit scores, big down payments and low default rates. And they aren’t linked to the government programs that cost banks tens of billions of dollars in fines related to the subprime-loan debacle.
These loans predominantly go to white and Asian borrowers, the analysis showed. In 2014, 3.0% of the biggest banks’ jumbo borrowers were Hispanic and 1.3% were black. As the 10 big banks issued proportionally more jumbos, they collectively decreased their share of all home loans to blacks and Hispanics. Their proportion of lending to those minorities also fell in non-jumbo mortgages alone, though not by as much.
Among all approved mortgage applicants from the 10 banks, 5.3% were black in 2014, down from 7.8% in 2007; 7.4% were Hispanic, down from 10.6%.
Just as the subprime customer was the ideal borrower for some banks before the crisis, the jumbo borrower is most appealing for many banks now. While the jumbo uptick isn’t solely responsible for lending declines to some minorities, these loans epitomize the direction banks are turning their mortgage operations—toward safer, more-affluent customers who tend to be white or Asian.
This poses an existential question for regulators and executives almost a decade since the crisis: Are banks tools to stimulate economic growth and deliver profits for shareholders, or are they like utilities, whose primary purpose is to deliver valuable services to a broad spectrum of society?
James Dimon, chief executive of J.P. Morgan Chase & Co., referred to the dilemma in his April shareholder letter when explaining why his bank has mostly stopped giving loans insured by the Federal Housing Administration. Leaving that lower-end market could “make it more difficult to meet our…fair lending obligations,” he said, adding that the bank believes it can comply with the rules.
At J.P. Morgan, America’s largest bank by assets, jumbos were 22.5% of mortgages approved in 2014, up from 9.1% in 2007, the Journal analysis found. Its mortgages to blacks fell to 3.8% from 8.2% and to Hispanics fell to 8.7% from 15.1%. A bank spokeswoman declined to comment.
The Department of Housing and Urban Development is looking into mortgage-lending declines to some minorities, said Bryan Greene, HUD General Deputy Assistant Secretary for Fair Housing and Equal Opportunity, declining to specify whether it was examining specific lenders or products. A number of the federal agencies overseeing fair lending have said there isn’t necessarily a conflict between fair-lending requirements and new mortgage regulations or jumbo lending.
Regulators have fined two smaller banks, one focused on jumbos, in the past nine months for not lending enough to blacks and Hispanics. Prosecutors have said they are developing other cases.
It isn’t clear if the move to jumbos is hurting overall access to mortgages among minorities. In 2014, the number of mortgages to blacks and Hispanics combined was down 52% from 2007 across all bank and nonbank lenders, compared with a 37% drop for other racial groups combined. Yet overall mortgage-approval rates for blacks and Hispanics rose during the period, federal data show, as these borrowers increasingly turned to small lenders and “nonbank” lenders.
‘Waste of time’
The jumbo shift has led real-estate broker Corwyn Melette to generally stop referring his clients, mostly African-Americans, to big banks. Before the crisis, the North Charleston, S.C., broker said, he referred many customers to such institutions.
After the bust and the ensuing tightened underwriting requirements, he found the same banks approved fewer of his clients, who often have credit-score problems and don’t require jumbos, he said. Most of his clients, whose average mortgage is around $150,000, now get FHA loans from nonbank lenders.
“It’s a complete waste of time” to apply with the big banks, he said.
It also isn’t clear why blacks and Hispanics are borrowing less often. They were more likely to take out higher-rate mortgages, often subprime, than white and Asian customers in the years leading to the crisis, according to a Federal Reserve analysis. That leaves the possibility that a greater proportion of blacks and Hispanics who could get loans before the crisis don’t meet today’s tighter credit standards.
Lending to blacks and Hispanics is also falling among lenders outside the big 10, at a somewhat slower rate. Among all other bank and nonbank lenders, 5.5% of mortgage approvals went to blacks in 2014, down from 7.5% in 2007; 9.1% went to Hispanics, down from 10.7%. Jumbo lending fell as a proportion of those lenders’ mortgages, suggesting other factors are at play.
The 10 banks play an outsize role in America. They issued 13% of all U.S. home loans in 2014, and their strategies have ripple effects across the country. Their operations in diverse urban areas could subject them to greater requirements to lend to minorities than some smaller lenders.
Their shift toward jumbos involves a big shift in lending dollars. In 2014, about 62,000 of the big 10’s home loans were jumbos, or 13.5%, versus 8.1% in 2007. In 2014, 41% of their $126 billion in mortgage approvals went to jumbo borrowers, compared with 29% of $314 billion in 2007.
Five of the 10 banks declined to comment. The others— Wells Fargo & Co., Bank of America Corp., Citigroup Inc., U.S. Bancorp and TD Bank, the U.S. unit of Toronto-Dominion Bank —said they were committed to complying with regulations and to lending diversity.
Bank of America bought Merrill Lynch during the crisis, which it said gave it a new wealthy clientele qualified for jumbos. Its jumbo lending rose to 15.6% of approved mortgages in 2014 from 8.0% in 2007.
Its mortgages to Hispanic borrowers fell to 8.6% from 14.9% of its total, while black borrowers fell to 5.9% from 9.8%. “Our success in jumbo lending has in no way diminished our focus on reaching out to multicultural borrowers,” spokesman Terry Francisco said, adding that it has recently started new mortgage initiatives aimed at black and Hispanic borrowers.
Citi said it sold branches in areas such as Texas, focusing more lending in areas including New York and San Francisco where home prices are higher. Its jumbos rose to 25.6% of approved mortgages in 2014 from 7.3% in 2007. Its Hispanic borrowers fell to 9.2% from 10.3%, while black borrowers fell to 5.9% from 8.4%. Its share to whites fell, too, with increases going to Asians and people who didn’t provide a race or ethnicity.
“Citi is proud of its deep commitment to making sure our lending standards are fair to all of our customers,” Citi spokesman Mark Rodgers said.
At the housing boom’s height, when smaller loans were more appealing, banks didn’t need jumbos as much. Investors considered them riskier because they weren’t backed by mortgage giants Fannie Mae and Freddie Mac or insured by the FHA.
The subprime-loan crash, though, involved many loans the banks sold to Fannie and Freddie. The aftermath led regulators to prod banks into less-risky loans. The 2010 Dodd-Frank law required more disclosures and tougher underwriting for mortgages.
Now, banks prefer jumbos in part because they avoid the liability of the penalties that can come with federally-backed loans, and they allow more-flexible underwriting procedures. These affluent borrowers are also promising prospects for selling other bank products. Originating Fannie and Freddie loans has also become more expensive as the mortgage-finance companies increase fees.
“It is much easier to make a $1 million loan than a $100,000 loan,” said Ken Thomas, a Miami-based consultant to banks on fair-lending issues.
Some 3.1% of jumbo loans were delinquent or in foreclosure as of March, compared with 5.4% of smaller loans, according to mortgage-data firm Black Knight Financial Services. Because banks typically keep jumbos in-house, “we’re going to underwrite them as perfectly as we can,” said U.S. Bancorp CEO Richard Davis at a November conference, making the loans “the regulators’ dream.”
Jumbos were 10.2% of U.S. Bank’s approved mortgages in 2014, up from 2.1% in 2007. The bank said: “We work diligently to ensure that our loan originations capture a representative racial and ethnic mix and provide access to credit for all borrowers who qualify.”
One indication of banks’ eagerness to woo jumbo borrowers is that average interest rates on 30-year fixed-rate jumbos in 2014 dropped below those on smaller mortgages for the first time in decades, according to mortgage-data firm HSH.com.
Chris and Pearl Mohler recently bought a five-bedroom $1.65 million home in Syosset, N.Y. The couple, white and Asian, liked the diverse community. Wells Fargo gave a 2.75% initial rate on an adjustable-rate jumbo. “The low rate, economically, it did allow us to move,” said Mr. Mohler adding that it felt like “easy money.”
The federal data in the Journal analysis didn’t include detailed data on credit scores, incomes and assets, so it wasn’t possible to study factors such as borrowers’ financial situations.
The definition of unfair lending isn’t precise. Regulators use analyses of the same federal data to find banks that lend to relatively fewer minorities than others in their areas. They also use qualitative measures such as interviews with bank employees to determine if there are violations.
There is little way of definitively knowing if a bank’s lending will trigger fair-lending violations, said Mr. Thomas, the fair-lending consultant. To avoid trouble, he said, banks must not egregiously ignore minority or low-income borrowers even as they focus on jumbos.
Prosecutors alleged that is what happened at Hudson City Bancorp Inc., which last year reached the largest settlement in the Justice Department’s history for residential-mortgage “redlining,” or avoiding lending in certain minority neighborhoods. The bank’s mortgage operations mostly focused on jumbos, according to an analysis from trade publication Inside Mortgage Finance. The Justice Department and Consumer Financial Protection Bureau alleged it discriminated by not making enough mortgages in neighborhoods where black and Hispanic borrowers lived.
Hudson agreed to pay about $33 million without admitting wrongdoing. The bank, acquired by M&T Bank Corp. last year, said it disagreed with the authorities’ statistical analysis. M&T spokesman Michael Zabel said the bank has “a commitment to building upon our long record of providing credit in the communities we serve.”
Wells Fargo, the largest U.S. jumbo lender, has bucked the big-bank trend in minority lending. In 2013, it established a jumbo-underwriting team that allowed it to avoid “following a simple set of rules that could keep [borrowers] from being approved when using traditional underwriting guidelines,” said Wells Fargo mortgage executive Brad Blackwell. Wells Fargo increased its proportion of Hispanic borrowers in 2014 while posting a lower-than-average drop in black borrowers from 2007.
One small bank, Luther Burbank Savings of Santa Rosa, Calif., found ways to keep jumbos from dragging down its overall lending to minorities. The Justice Department in 2012 penalized it for allegedly discriminating against blacks and Hispanics by setting a minimum loan of $400,000. The bank didn’t admit wrongdoing.
Luther Burbank last year announced it was doubling down on jumbos. It also increased advertising in Spanish and launched programs to make smaller loans. About 22% of its 564 mortgages in 2014 went to black and Hispanic customers, up from 12% before the settlement.
“If you make a concerted effort to target all communities and all groups, you can find them,” said Jason Pendergist, its president of consumer and commercial banking, “even if you’re focused on jumbo loans.”