When it comes to extravagant housing, traditional mortgage rules don’t apply

Paying for an average home is a rough process — a hefty down payment can wipe out savings, the paperwork feels endless and the mortgage often lasts decades.

In the upper echelons of the Southland residential real estate market, financing isn’t much easier — it just involves more eager-to-please private bankers, vast reserves of cash and massive, multimillion-dollar loans.

Los Angeles is the fifth most important center of wealth in the world, based on the current and projected population of well-heeled residents, the value of property investments and connectivity to other global hubs, according to the most recent wealth report from British consultancy Knight Frank. Only London, New York, Hong Kong and Shanghai rank higher.

Prices in the city’s luxury residential market ballooned 5.3% from 2015 to 2016 — the largest increase in the U.S. behind Seattle’s 9.7% upswing, according to the report.

Nationwide, the median price for a luxury home at the end of July was $1.6 million, according to the Institute for Luxury Home Marketing. In Los Angeles, it’s nearly $4.1 million.

Most high-end buyers in Southern California are locally based, although many hail from abroad.

“The buyer of the $10-million-plus property comes from everywhere,� said Stan Smith, managing director of Teles Properties, a Beverly Hills-based luxury real estate brokerage. “Aside from the occasional headline-grabbing uber-celebrity, most purchasers are people you’ve never heard of.�

In this market, cash is king. So far this year in Los Angeles County, excluding Beverly Hills and West Los Angeles, 35% of homes priced $2 million or higher were purchased using all cash, according to Multiple Listing Service data provided by the California Assn. of Realtors.

But when rich home buyers don’t have the liquidity to purchase their homes outright, many turn to massive mortgages known as jumbo loans.

The average borrower commonly uses a so-called conforming loan, which is backed and capped by the government. For most of the country, the limit is $424,100, but in pricey Los Angeles County, the maximum is $636,150, according to the Federal Housing Finance Agency.

Jumbo loans exceed the mortgage amount that Fannie Mae and Freddie Mac will purchase from lenders. Many experts blame the financing tactic for helping to enable the housing bubble by encouraging extravagant property purchases.

But in recent years, interest rates for jumbo mortgages have bucked expectations, said Lynn Fisher, vice president of research and economics for the Mortgage Bankers Assn.

“Historically, conforming loans are more liquid and are backed by government agencies, so from a supply-side point of view, they’re easier loans to make,� she said. “But since the crisis, we’ve seen a phenomenon where jumbo rates are as low and sometimes lower than conforming.�

Lenders have loosened the spigot for jumbo borrowers. Credit supply for jumbo loans surged 2.7% in July from the previous month, compared with 0.3% for conforming loans, according to a credit availability index from Fisher’s group.

High-net-worth home buyers are attractive to lenders because their substantial income and assets make them appear to be less of a default risk. And many banks offer the loans to entice premium clients.

“There’s a lot of advertising, a lot of competition to provide these loans right now,� Fisher said.

Still, from origination to payout, the jumbo-loan process can be vexing, especially for borrowers whose wealth is spread across different types of income, investments, inheritance and assets. Documentation is often extremely complicated.

“A lot of these borrowers can’t walk into a traditional bank and get a $5-million loan,� said Brandon Boyd, an executive mortgage consultant with Encinitas lender Drop Mortgage. “It’s hard for a bank lender to pull back and understand that income.�

Boyd said his company uses a more specialized approach, considering financial factors that might elude a bank relying on an automated screening system. In addition to common mortgage products, Drop also offers customized jumbo loans of up to $15 million.

Many clients — including entrepreneurs, film producers and athletes — aren’t focused on their day-to-day financials, resulting in less-than-stellar credit scores, Boyd said. Or they’re willing to pay a premium to protect their privacy by closing a sale through a limited liability company, which is prohibited for Freddie Mac and Fannie Mae mortgages.

Drop’s loans — most of which fall between $800,000 and $2.5 million — comply with government regulations and have yet to result in a default, Boyd said.

“It’s not irresponsible lending at all — it’s an alternative space, but it’s not the subprime of the past, not by a long shot,� he said.

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