While first-time buyers are finding it increasingly difficult to secure funding for a home purchase, wealthy buyers are receiving million-dollar loans at an unprecedented pace. In fact, million-dollar U.S. housing loans have surged past their previous highs. Banks are handing out mortgages of as much as $10 million to wealthy individuals in record numbers. While speculation may only convolute the reasoning behind the recent surge, it is likely due to mortgage rates that remain near record lows. They are borrowing while the time is right – rather than liquidating their investments amid a stock market gain of 7 percent.
According to Erin Gorman, managing director at Bank of New York Mellon Corp., requests for multimillion-dollar loans are more prominent than they have ever been. Her bank didn’t even bat an eye when a client was approved for a mortgage in excess of $6 million to supplement the purchase of a secondary property in Colorado.
Aside from the amount borrowed, wealthy individuals appear to display certain characteristics that are not representative of the average borrower. “These high-net-worth borrowers do act differently than first-time buyers, who borrow because they have to,” said Gorman. “High-net-worth borrowers don’t have to borrow. They choose to, so they’re very strategic about what, why, and when they borrow.”
While many may be confused as to why such a wealthy individual may want to borrow money from a bank, and be subjected to mortgage rates, there is sound reasoning behind their actions. Essentially, they are taking advantage of a market that is very conducive to their purchases. Strict lending practices, resulting from the previous recession, have crippled loan volume. In order for banks to make up for the lack of volume, they are currently offering low rates – rates that wealthy individuals are more than happy to use to their advantage. It is much cheaper to apply for a mortgage than it is to liquidate any assets they may have in the stock market.
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.
Union Bank, alone, originated more than 350 loans of at least $2 million this year. Its average loan size is about $900,000.
Unfortunately, the same sentiment has not been extended to first-time buyers. In fact, it is quite the opposite. Due to inadequate credit scores and a distinct lack of income, banks have severely limited the amount of home loans being extended to millennials. According to the National Association of Realtors (NAR), 28 percent of existing home sales in June were comprised of new buyers. That is a stark comparison to October 2008 when first-time buyers represented 35 percent of all existing home sales.
Conversely, wealthy homeowners have found the current market to be favorable. Jumbo mortgages, or those that exceed $417,000 in most areas, are only made to the most credit worthy borrowers. Seeing as how they exceed the limit for government-controlled Fannie Mae and Freddie Mac guarantees, banks generally hold them.
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, as a beneficiary of current conditions, has seen the average loan made by his associates increase to $1 million from $800,000 this year.
High-net-worth borrowers are also granted access to deals that aren’t necessarily advertised. These individuals are critical to banks, and are therefore catered to very specifically. Customers who have relationships with banks, for example, may be allowed to borrow against inherited investment assets rather than income. Additionally, some banks may provide hybrid mortgages that benefit individual borrowers. 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 Cyndee Kendall said.
Low rates provided by current market conditions are proving to be very beneficial to high-net-worth borrowers, as it is a cheaper alternative to selling off portfolios to use their own cash. As the stock market continues to reach new highs, it would be impractical to remove any assets. In other words, cash is better spent reinvesting in their business than using it to acquire property.
However, while multimillion-dollar home loans reach an all time high in the first half of 2014, there are still affluent buyers who prefer cash purchases. For one reason or another, a small population of wealthy individuals would rather use cash than provide lenders with the required documentation. Others may even avoid going the mortgage route because of the stiff competition over the small amounts of inventory that are currently available. Providing an all-cash offer makes landing the home of their dreams that much easier. All-cash sales made up 32 percent of existing home transactions in June compared with 31 percent a year ago, according to data from the NAR.