Press reports in June that retired television personality Ed McMahon faced foreclosure on his Beverly Hills, California, home — for which he had borrowed $4.8 million from Countrywide Financial Corp. — sparked speculation that the credit crunch was spreading into the high-net-worth sector. Indeed, as one form of debt after another has fallen victim to the crisis that has roiled the financial industry over the past year, jumbo mortgages have gotten hard to find, at least from traditional mortgage sources.
It’s paradoxical: The wealthy borrowers who can afford jumbo mortgage loans — those exceeding the limit of $417,000, or in some high-cost locations $729,750, for sale to the now-government-controlled Fannie Mae and Freddie Mac — wouldn’t seem to pose a high default risk, yet capital-strapped mortgage banks have all but closed off that high end of the market. This is so even though jumbo borrowers pay a premium interest rate, typically up to a percentage point higher than on Fannie Mae– and Freddie Mac–conforming loans.
Lately, healthy banks with big wealth management units, among them Chicago-based Northern Trust Co. and Bank of New York Mellon Corp., have been pushing into the jumbo-mortgage business, seeking to attract and solidify relationships with affluent clients. With their ability to take loans onto their balance sheets rather than securitizing them, these banks are experiencing an unprecedented surge in mortgage activity, and they are prepared to do more as other banks get out of the business while the rich seize the opportunity to purchase properties at bargain-basement prices. “We have more than sufficient capital and room on our balance sheet to do a lot more business,” says Erin Gorman, national sales director for jumbo mortgage lending at BNY Mellon in Boston. “We’re nowhere near capacity.”
As of June 30, BNY Mellon’s total mortgage sales were up 145 percent over the same period last year, the most recent statistics available. Gorman declined to provide the total dollar value of the mortgages, which the bank doesn’t normally disclose. The number of closed mortgages is 117 percent above last year’s, and the loans in the bank’s pipeline are also running at more than double the 2007 pace.
The $201.2 billion-in-assets bank, which derives 80 percent of its revenue from fee-based businesses, posted healthy results overall for the first six months of the year. Revenue rose 14 percent, to $7.7 billion, and pretax operating income grew 22 percent, to $2.6 billion. Gorman says BNY Mellon often provides 100 percent financing on jumbo-financed homes, designating a portion of clients’ investment portfolios as collateral. “That way other assets can continue to be actively managed and interest is deductible,” she says. Gorman adds that business growth is attributable to both existing and new clients. “It’s going to take other institutions a while to get back in the game,” says Gorman, “and we think we’ll see strong results for at least one to two more years.”
Keith Gossler, Northern Trust’s chief banking officer, says that both the number and the dollar value of jumbo mortgages on his bank’s books doubled in the first quarter of 2008, compared with a year earlier. Northern Trust, which has $74.8 billion in assets, is looking to get a longer-term foothold in the mortgage business by emphasizing its ability to customize loans. The bank can tailor a loan’s amortization schedule to a specific time frame, such as the client’s years to retirement, and can provide flexibility on prepayments, which in many cases incur penalties, and on the type of collateral that is accepted to back the loan.
“Often we lead with a banking product to give people a taste of Northern and our credibility,” says Gossler. “The mortgage business is a great feeder system.”
Wealth management bankers say that their clients are quite solvent and looking for funding to take advantage of buying opportunities. Northern Trust’s Gossler says the rich are making significant investments in addition to their existing homes, buying adjacent properties or purchasing second and third homes. He tells of one borrower who bought two lots in a ski resort area, one to use as a vacation home and the other to sell on speculation, defraying some of his costs. The bank customized a credit package — a construction loan and a long-term mortgage commitment — and gained a full-service wealth management client in the process.
