Jumbo mortgages are no longer the cheapest mortgages around

Record-low interest rates are helping home buyers lock in years of savings on future mortgage payments. But those searching for larger homes or in expensive markets aren't reaping the same rewards.

The average rate on a 30-year jumbo mortgage was 3.77% in mid-July, more than 0.4 percentage points above the average rate on smaller, conforming loans, according to Bankrate.com, a personal-finance website. From mid-2015 until this spring, jumbo rates had been consistently lower than or equal to the rates on conforming loans.

The reversal is just one of the ways the coronavirus crisis has wreaked havoc on the mortgage market. The same force pushing most mortgage rates to record lows -- investors piling into safe-haven assets like government bonds -- has pushed jumbo loans out of favor.

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A jumbo loan is one considered too big to be sold to government-backed mortgage giants Fannie Mae and Freddie Mac. In most markets, it must be larger than $510,400 this year, but in the highest-cost areas it must be larger than $765,600. Conforming loans meet the guidelines for government backing.

In recent years, banks have favored jumbo mortgages for their relatively low risk level, since jumbo borrowers tend to be wealthier. Banks generally keep jumbo loans on their own books, betting that the borrowers are less likely to default.

But the Federal Reserve has taken extraordinary steps to intervene in the mortgage market during the coronavirus pandemic, including agreeing in March to buy an essentially unlimited amount of mortgage-backed securities.

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"The loans that get made are those that have a ready buyer for them," said Greg McBride, chief financial analyst at Bankrate.com. "Government-backed loans are really the only game in town."

What is more, jumbo loans aren't entitled to forbearance under the Cares Act.

That law, meant to prop up the economy during the coronavirus pandemic, allows homeowners to request up to 12 months of postponed mortgage payments. If the loan is backed by the government, the mortgage servicer is generally supposed to grant the request. If the loan is a jumbo, the servicer has more freedom to say no.

Still, mortgage companies seem to be saying yes. The share of jumbo loans in forbearance stood at 10.2% in mid-July, higher than the 7.8% rate among all mortgages, according to mortgage-data firm Black Knight Inc. Some banks might be quick to grant relief on jumbo loans since they are often holding those loans rather than selling them to investors, leaving the banks more exposed if the loans go bad.

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Lenders have been raising credit standards for all sorts of loans since the coronavirus hit. They started doing so for would-be jumbo borrowers shortly after the Fed's decision, ensuring that only the upper echelon of potential buyers could access jumbo credit. Wells Fargo & Co., for example, said in early April that it would refinance jumbo mortgages only for customers who hold at least $250,000 in liquid assets with the bank. The bank removed that requirement in early July.

Rick Dreyer was turned down by several lenders when he went looking for a jumbo loan this summer in northwest Arkansas to buy another investment property.

Mr. Dreyer and his girlfriend previously used one lender to purchase four different properties. But that lender wouldn't take the couple's rental income into consideration because of the risk that tenants might not pay rent, Mr. Dreyer said.

Another lender said the pair would need about $11,000 of additional income a month to qualify for the larger loan.

In the time that he was searching for a jumbo loan, his first-choice home went off the market. The couple decided to forgo the jumbo, and found a property where a 20% down payment would put the mortgage a few thousand dollars below the jumbo threshold.

Jumbos weren't always so hard to come by. Originations peaked at $650 billion a few years before the financial crisis, according to industry-research group Inside Mortgage Finance, when aggressive lenders lent many borrowers more than they could afford. Jumbo originations fell off sharply during the crisis and its aftermath, though they hit a postcrisis high of $392 billion in 2019.

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Applications for loans of at least $625,000 filed in May were down about 5% from the same time last year, according to the Mortgage Bankers Association.

Still, there have been recent signs of life in the jumbo market. First-quarter originations reached $80 billion, down about 22% from late 2019 but up 25% from the same time last year, according to Inside Mortgage Finance.

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But the recent activity doesn't mean the spread between jumbo and conforming rates will narrow soon, Mr. McBride said. The gap lasted for about five years after the financial crisis.