Mortgage Update: Jumbos Remain Elusive

At a time when some mortgage products are showing signs of life, jumbo mortgages are hard to get and expensive, making it difficult for many would-be move-up buyers to take action. What to do?
Since the credit crunch hit about two years ago, many lenders have all but abandoned jumbos, which are too big for secondary mortgage market companies Fannie Mae and Freddie Mac to buy for packaging into securities and outside the limit of FHA. Yet with their reluctance, lenders are leaving money on the table, say analysts and professionals in the lending community.


A study by the NATIONAL ASSOCIATION OF REALTORS® released in mid-May shows that the supply of homes for sale is stabilizing in many markets, a sign that steeply discounted home prices are attracting buyers looking for bargains. Yet when higher-cost homes that would require jumbo financing are looked at separately, the supply rises dramatically, and in May, it stood at about 40 months.


The near-absence of lenders means a jumbo borrower, even one with stellar credit, pays a significant premium above what conforming-loan borrowers pay, even those with far poorer credit record. NAR Chief Economist Lawrence Yun, speaking with two jumbo mortgage lenders at NAR’s meetings in Washington last month, said if more lenders were to venture into the jumbo market, these buyers could help lift home sales, shore up prices, and, in turn, strengthen the broader economy.


“It’s a question of fairness,” Yun says, not just for buyers but for sellers and existing-home owners who need to refinance. With no affordable supply of loans available, sellers who can’t find buyers and those who want to stay put often go into foreclosure, fueling more price declines and reinforcing lenders’ reluctance to enter the market.


The lenders that are in the market say they’d welcome more competition because it would help everyone. “We need more lenders to come in,” says Vijay Lala of Bank of America, which reentered the jumbo market about eight months ago. The bank closed about $4 billion in jumbo loans in the first quarter of this year and closed about $16 billion last year, Lala says.


Yet it remains a market only for serious borrowers. To get Bank of America financing, borrowers must come with 20 percent down and have a good credit score. They’re also restricted in the amount of home they can buy: no more than $1.5 million, though that limit will rise later this year to $2 million, Lala says. Interest rates on these loans are 6.5 percent to 7 percent. Conforming loan rates, by contrast, are trending around 5 percent.


Although a $1.5-million loan limit might seem like the exclusive domain of the rich, in high-cost areas such as parts of California, New York, and Florida, jumbo borrowers are squarely in the middle-income range, says David Adamo, whose company, Luxury Mortgage, specializes in jumbo loans.


Adamo says the federal government can help simply by tweaking the so-called conforming-jumbo market composed of homes above the traditional conforming-loan limit of $417,000 and below the new conforming-loan limit of $729,750. Loan limits are set by county, and only about 75 counties in the United States are eligible for loans up to the $729,750 limit. All the other high-cost areas fall somewhere between $417,000 and that limit. Thus, high-cost homes in a county with a lower median home price can’t qualify for the higher conforming loans.


A simple regulatory fix that would eliminate the county-by-county restrictions would go a long way to clearing up the problem, Adamo says. Lenders should be allowed to decide which borrowers, based on their creditworthiness, can apply for jumbo conforming loans, letting their underwriting considerations determine loan decisions.


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