Ann Choi, Yizhu Wang, and John Gittelsohn of Bloomberg report that wildfires in Los Angeles have left banks holding risky jumbo loans, which make up over 72% of mortgage debt in affected areas. Falling property values and underinsurance increase the risk of defaults. While banks offer forbearance, the financial impact is uncertain, with potential losses in the billions. They write:
In the affluent Los Angeles neighborhoods scorched by wildfires, jumbo mortgages on multimillion-dollar homes are commonplace, making the loans a potential pain point for the banks left holding them.
More than 72% of mortgage debt fell into the category of nonconforming — also known as jumbo loans — in the parts of Los Angeles devastated by the fires. That’s nearly five times the nationwide average, and almost triple California’s 26% rate, according to a Bloomberg News analysis of Consumer Financial Protection Bureau data. More than $11 billion of jumbo loans were issued in the affected areas and kept on bank books from 2018 through 2023. […]
The jumbo loans on banks’ balance sheets make lenders responsible for the losses should borrowers walk away from their debt. Lenders have kept billions of dollars of mortgages on their books because prices for homes in Pacific Palisades and many in Altadena put loans above the limit for purchase by government-sponsored entities. For 2025, the Federal Housing Finance Agency’s conforming loan limit is $1.2 million for high-cost areas, including Los Angeles County — meaning banks can’t sell mortgages of higher amounts to Freddie Mac or Fannie Mae. […]
Total property and capital losses could reach as high as $164 billion, with insured losses estimated at $75 billion, according to economists at the University of California at Los Angeles. […]
Homeowners in the higher-cost area of the Palisades fire — especially those covered through the California FAIR Plan, which provides basic fire insurance to those who can’t get coverage elsewhere and is the second-largest insurer in the fire areas — were more likely to be under-insured because of the plan’s $3 million coverage limit, he said. Also more homes in the Palisades fire area have lost coverage from private insurers. For example, State Farm said last year it was canceling 69% of its policies in the 90272 ZIP Code, which includes Pacific Palisades.
“In terms of high-value homes, the ratio is far greater in the Palisades for homes that have the FAIR Plan because of all the cancellations,” Ghyczy said. […]
Jumbo loans often are considered safe because they are made to high-income homeowners with pricey properties. Lenders often require down payments larger than the standard 20%. Since 2018, lenders nationwide have kept nearly $2 trillion of jumbo loans on their books, federal data show. Banks and credit unions, whose share of overall mortgage lending is 31%, originated more than 70% of such nonconforming loans.
“Banks have largely reduced their footprint in the conforming-loan market due to increased regulatory pressures and associated costs,” said Walden of Intercontinental Exchange. “That said, they remain a predominant player in the jumbo market due to their access to capital and that market’s ability to help banks service the real estate needs of their higher-wealth clients.”
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