Jumbo loans making a comeback

For buyers of homes in high-priced areas or looking to move up to a home that's too high for Fannie Mae or Freddie Mac to buy, there's some good news: jumbo loans are reappearing for terms that are becoming more reasonable. From a BuilderOnline.com story:

Forced to near extinction by shaky credit markets, the jumbo mortgage loan is making a comeback, which is good news for builders who sell high-end homes or build in expensive markets.

Interest rates have improved, and more financial institutions are starting to lend money for home mortgages with price tags too high to be bought by Fannie Mae or Freddie Mac, said industry watchers...

Bank of America recently announced it was jumping back in the jumbo business. ING has also been offering the loans above the $417,000 conforming limit in most markets and $729,750 in high-cost areas.

Keith Gumbinger, of HSH Associates, a mortgage research firm and publisher, said banks are more willing to lend money for jumbo loans because they have more cash to lend, and there aren’t many other profitable places to put it. Banks have more cash on hand because of TARP money and because the low interest rates have led many home owners to refinance their homes, paying off their old loans in the process....

Still, while rates on jumbo loans have declined significantly from last fall, roughly 160 basis points from 7.90% at Halloween, they still are higher historically compared to conforming home loans. Last year there was roughly a three percentage-point difference and now it’s down to closer to a two-point spread...

Why the bump in jumbo loan amounts hasn't worked

When the conforming loan limits were raised to accommodate more jumbo loans, it was thought that it would spark home sales activity in higher-priced areas, but that hasn't quite done the trick. A CNNMoney.com story examines why:

When the housing crisis hit last summer, it became very hard for borrowers to land the jumbo loans they needed to buy homes in high-priced areas, like California and New York.

So as part of the Economic Stimulus Act, Congress tried to get funds for jumbo loans flowing again by temporarily raising the dollar limits for mortgages that Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) can buy. The two government-sponsored entities (GSE) had previously only been permitted to buy so-called conforming loans of up to $417,000, and then resell them on the secondary market.

The new limits raised that conforming loan cap to as much as $729,750 in some high-priced metro areas through December 31, in order to make home loans more readily available to help stabilize falling markets.

But the move hasn't juiced the market, and so the House Financial Services Committee is holding a hearing Thursday to examine why that is...

Despite the increased caps, these new 'conforming jumbo loans' - for anything between $417,000 and $729,750 - are still more expensive than the conforming loans below $417,000.

For months after the conforming jumbos were introduced, interest rates for them ranged between a point and a point and a half higher than on regular conforming loans. That made jumbo loan borrowing much more expensive; for a $600,000 mortgage, a borrower paid an extra $400 to $600 a month.

In the past, the spread between jumbo and conforming loans was much smaller, a quarter point or so...

The problem: The investors who buy mortgages on the secondary market still consider these new conforming jumbo loans riskier than the original conforming loans, and put a higher risk premium on them...

That reluctance comes despite the fact that buyers who use jumbo mortgages tend to be better credit risks and often put more money down, McDonald said.

Part of the problem is simply that fear is contagious...

ndeed, Fannie and Freddie don't actually package conforming jumbos for sale to investors in the same way they treat sub-$417,000 conforming loans. They are not what's called "TBA-eligible." These are "to-be-announced" transactions where the purchase price is settled at some future date.

The Securities Industry and Financial Markets Association decided back in February to exclude jumbo conforming loans from TBA-eligible pools. But the TBA market is well established and understood by investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association (MBA).

"Buyers of securities feel very secure about this market," he said. "They're accustomed to the pricing and they know how the securities perform."

The exclusion of conforming jumbos from that market makes them a somewhat unknown security. "No one is sure what their performance will be, so no one is sure how to price them," said Keith Gumbinger, of HSH Associated, a publisher of mortgage market information.

The Mortgage Bankers Association (MBA) argued that the new conforming jumbos should be issued as TBA products, but there was resistance to this. Fannie and Freddie were hesitant to introduce any new element that might harm the conforming loan market...

Jumbo borrowers are more likely to pay off their loans early, which cuts off the revenue stream of their interest payments for investors, while those with $100,000 mortgages tend to keep making the same monthly payment year after year.

If jumbos were packaged with these in the same mortgage-backed securities, investors would require higher interest rates to purchase them. Borrowers of conforming loans would have to pony up the increased interest, in effect subsidizing more affluent, jumbo loan borrowers.

There are other risk factors that makes investors wary. Jumbos are, by definition, less diverse geographically; they're only available in about 70 metro areas - many of the most challenging markets in the nation...

In early May, Fannie made a change in the way these loans are handled; instead of packaging them for sale on the open market, they are keeping them in their portfolios. Fannie can set the price itself and is doing so as if the loans were TBA-eligible.

As a result, the pipeline for the loans has opened up during the last couple of weeks.

Weekly mortgage application statistics from the MBA reveal the change. In March, 2007, 12.1% of all mortgage loans requests were for jumbos. A year later, only 4.4% were. During the past couple of weeks, jumbos have accounted for 5.8% of all applications.

According to Freddie Mac Vice President Patricia Cook, interest rates for conforming jumbos are now a full point below regular jumbos and only two-tenths of a percentage point higher than conforming loans.

Gumbinger confirms that spreads between conforming and jumbo conforming have narrowed down to below half a point, good news for home buyers in high-priced areas.

Higher jumbo loan limits so far a failure

According to a story in The New York Times, the new rules which went into effect on April 1st (April Fool's Day, no less) have proved to be more mirage than reality, and have failed to do what Congress planned when they passed the legislation in February:

In early February, Congress gave beleaguered mortgage borrowers a rare cause for celebration. As part of the economic stimulus package, it passed rules intended to make it easier and less expensive for people to take out hefty loans in the nation’s costliest housing markets...

Instead, the effort to make it easier to get jumbo mortgages — loans over $417,000 — has yielded frustration and disillusionment.

Since the rules took effect April 1, many prospective borrowers and their mortgage brokers say the new loans are either not available or the rates are far higher than they expected. Relief, they say, has been replaced by grief...

Under the new rules, a sizable number of jumbo loan would be treated by the mortgage industry in the same way as smaller conventional loans. This change — raising the ceiling for loans backed by government-sponsored housing finance agencies to nearly $730,000 in the nation’s costliest locations — was intended to bring rates down for more borrowers and stimulate the lending that is needed to get the economy moving again.

The goal of making most of these jumbo loans accessible was aimed not at helping subprime borrowers, those people with spotty credit histories. Rather, it was meant for borrowers with good credit and ample down payments, but who wanted to buy a house or refinance a home loan in the costliest housing markets, like New York, San Francisco, Anchorage, Baltimore, Edwards, Colo., and Jackson, Wyo...

But the real concern over this program’s failure goes beyond people seeking million-dollar homes. The danger, economists say, is in how a wave of foreclosures and rising inventory of homes for sale will deepen and prolong the economic downturn started by the subprime mortgage crisis...

Robert Edelstein, a professor at the Haas School of Business at the University of California, Berkeley, said that it is essential to a healthy economy that jumbo borrowers in these upper-tier markets are able to get financing. “There could be a contagion,” he said, as the subprime woes “move up the chain.”...

Despite an eager consumer base, it appears few such loans have been made, according to John Bancroft, executive editor of Inside Mortgage Finance. He expects activity to pick up as the market adjusts to the rules. “It’s going to take some time,” he said.

But time may run out at the end of the year, when the system is supposed to revert to the old rules. Not surprisingly, lenders and their secondary investors are hesitant about changing their business for a short time.

And rates have not dropped — at least not to the degree that many borrowers and mortgage brokers had expected. In some cases, “conforming” loans, so designated because they conform to the government-sponsored rules, are a full percentage point below the newly conforming jumbo loans intended to be covered by the new law...

The reason has to do with the way loans are sold and securitized. Conforming loans carry a lower interest rate in part because lenders can package and sell those loans as mortgage-backed securities directly to either Fannie Mae or Freddie Mac or to private investors who know that the housing finance agencies can buy them later. And some of those loans can be sold even before they are finalized because they qualify for the “to be announced” market that allows fixed-rate mortgage-backed securities to be traded freely as interchangeable commodities.

An influential trade group of the nation’s largest financial institutions, the Securities Industry and Financial Markets Association, recently made a key decision that some critics say has kept those rates from dropping. The association decided that loans above $417,000 — even those jumbo loans now considered by law as conforming — would not be eligible to participate in the “to be announced” market...

But critics in Congress counter that lenders and the mortgage-backed securities industry have dragged their feet.