Lenders are rethinking how they originate jumbo mortgages, leaning on automated underwriting technology to manage complicated details while navigating stricter investor overlays and a market that rewards those who can make the economics work.

The strategies vary, but the underlying issue is always the same: jumbo loans demand more from everyone in the transaction, and the lenders winning the business are the ones who have figured out how to absorb that cost efficiently.

Jumbo borrowers under more scrutiny

While many lenders do underwrite jumbos to conforming standards (and even use the government-sponsored enterprises' automated underwriting engines to do so), other products for the private-label market use alternative documentation. These include bank statement loans and debt service coverage ratio products.

Even when conforming standards apply, borrowers face more scrutiny than they would on a conforming or government loan, said Eric Bernstein, president of broker LendFriend Mortgage.

READ MORE: Should conforming loan limit math change?

"The reason is, the investors, the lenders, have the ability to create their own guidelines and create additional overlays or regulations in which the borrower has to qualify for," Bernstein said. "So jumbos are always going to be a tougher product, and the debt to income restrictions are just that more restrictive on jumbo products compared to standard loans."

The pricing applies the same logic. Portfolio jumbos typically carry a higher rate than conforming or government loans from the outset. But when rates are close, many borrowers will take the jumbo to avoid bringing extra cash to closing. If they can save a quarter-point, many times they will consider going conforming.

"The nature of mortgages, they're meant to be securitized and pooled, and so the more you can get them to fit into a box like a conforming conventional loan, the less expensive it is, the more affordable it is for the consumers," Bernstein said..

At the time of the interview, LendFriend's own jumbo rate in Texas was lower than conventional as secondary market pricing was being affected by the Iran conflict.

Larger loan sizes, higher borrower expectations

Certainty Home Lending is using Desktop Underwriter and an automated underwriting system for its jumbos, said Shadi Kamran, national business development & market growth executive. Certainty Home Lending is part of the Rate family.

"Clients have higher expectations with larger loan sizes, there's more documentation, there's more scrutiny, there's more moving parts," Kamran said.

Its correspondent investors are allowing the technology to help with underwriting in order to reduce the complexity and speed up the process.

"The fact that we're able to use the AUS as part of jumbo, we're seeing the biggest transformation in mortgage today is with jumbo and with jumbo non-QM business," said Kamran.

Some bottlenecks in the system remain, but using the technology is giving transaction participants more confidence these deals will be completed. Timelines are compressed and fallout is reduced, he said. 

Furthermore, non-QM investors are using technology from Prudent AI, Kamran added.

IMBs need jumbo mortgages on their menu

For independent mortgage bankers, the ROI question is less about rate and more about relevance. While 80% of the mortgages originated by Benchmark Mortgage, a Dallas-area non-bank lender are conforming, the remaining 20% are jumbo or non-qualified mortgages, said Norman Koenigsberg, its CEO.

Jumbo products are not something which IMBs can ignore in their offerings. This market, however, "is in a very transitional phase," in his opinion.

"The product itself is primarily driven by wealth and credit," Koenigsberg added. "The IMBs compete very fairly today against the banks primarily because of the Basel III rules," which put certain capital requirements on banks, although the Trump Administration is proposing a revision.

Banks do have certain advantages such as a lower cost of capital, as well as the business need to maintain that client relationship.

But companies like Benchmark also need to offer jumbo products to meet the needs of its referral base, a mix of Realtors, builders, trusted advisors like financial advisors and certified public accountants as well as attorneys, Koenigsberg said.

Plus, all of the IMBs, including Benchmark, have institutional relationships with the money-center banks, selling them jumbos on a correspondent basis.

So if a pivot in how the loan limits are calculated takes place, this will put more emphasis on the need for correspondent relationships, he said.

"I look at the outlook for the next two years as moderately bullish on the jumbo side, but definitely not an explosive growth," Koenigsberg said. "I think the biggest segment that we're going to see is needs-based refinance activity for those that have accumulated debt during the last three to four years, purpose-driven refinance activity."

Come back Monday for part 3 in our series on jumbo mortgage changes.