The interesting math behind super jumbo loans

September 18th, 2018 super jumbo loans

There are a select group of people out there who have monthly mortgages on par with the average cost of a house in the United States.

A 200,000 a month mortgage naturally stirs the curiosity: why would you take a loan instead of paying cash, why would a bank underwrite such a loan, where are these houses, and who are these people? I'll use this post to describe the rationale for both sides: lender and lendee in this interesting section of the mortgage industry.

Super Jumbo

To understand a super jumbo loan, let's first discuss what qualifies a jumbo loan. A Jumbo loan is a mortgage that exceeds Freddie Mac and Fannie Mae's loan servicing limits. A common misconception is that these guidelines are $1 million dollars. In reality, a jumbo mortgage in 2018 has a price greater than $453,100 in the continental U.S, and $679,650 in Alaska, Hawaii, Guam, and the Virgin Islands.

Super Jumbos, since they are in the eyes of the Federal Housing Finance Agency just jumbo loans, have no additional distinct classification by the FHFA. Super Jumbos are merely jumbo loans that are priced over $10 million dollars.

Where are these loans?

A relatively new phenomenon

Much of the rationale for taking on a loan over $10 million appears to be founded in the low interest rate environment since 2008. With the FED's policy of quantitative easing, mortgage rates dropped to historically low levels after the Great Recession.

The last two years alone account for 39% of the super jumbo loans outstanding. Interestingly, with the Federal reserve increasing interest rates, there also appears to be a downward trend in loan origination from last year

Lender Rationale

With the understanding that low interest rates are an incentive for wealthy buyers to purchase a mansion on loan rather than cash, a question arises as to why a bank would risk loaning anybody such a significant amount to purchase a house.

When Jay Z and Beyonce purchased their $88 million Bel Air manse, they took out a $52.8 million super jumbo loan with Goldman Sachs. With their negotiated 3.4% interest rate, they will be paying in excess of $200,000 a month. This is indeed a mind boggling mortgage payment to the average person, but the real take away is how low they negotiated their interest rate. A $50 million loan at 3.4% is a tremendous risk for Goldman Sachs.

For some lenders like Goldman Sachs, having a continuing relationship with wealthy clientele like Jay Z and Beyonce, who likely have significant financial assets under management, is worth the risk of underwriting a large mansion that only few in the world would be able to purchase. If it takes underwriting a 30,000 square foot house to keep $100 million in your wealth management division, banks are willing to do it because their competitors certainly will.