A jumbo loan is a mortgage greater than the conforming loan limit which currently stands at $417,000 for most counties in the country. Some areas, referred to as Municipal Statistical Areas (MSA), have higher conforming loan limits due to higher average housing prices.
Loans meeting the conforming loan limits are advantageous to jumbo mortgages because their interest rates are lower. Inaddition,qualifying for a conforming loan is easier than for a jumbo loan.
When Lehman Brothers failed during thefinancial meltdown,jumbo lendingnearly vanished with only a handful of lendersfunding them. Sincejumbo loans cannot be purchased by thegovernment sponsored enterprises, Fannie Mae and Freddie Mac, these loans must be either securitized and sold orretained in the lender's portfolio. Securitizationceased because investors did not want to buyresidential mortgage backed securities (RMBS).Most lenders' balance sheetsprohibited them from holding mortgages in their portfolio. Through the financial crisisa few national lenders continued underwriting jumbos such as ING, US Bank and Suntrust.
Besides a severe contraction in jumbo funding sources, underwriting guidelines became very stringent. The loan to value allowed by the lenders were reduced by 5%, 10% or more and at the same time property values were falling rapidly. The combination of lower loan to values and home values made many existing jumbo loans impossible to refinance unless the borrower brought cash to close.
With fewer jumbo lending participants and tighter qualifying requirements, the number of cash deals increased and overall jumbo production was anemic. However, this course may be changing.
If your loan is too largefor conforming underwriting, then more options are becoming available to jumbo borrowers. Recently,Wells Fargo re-entered the jumbo lending market with loan amounts up to $2 million and loan to values of 80% possible. Anotherpositive sign was thejumbo securitization by Redwood Trust Inc. of prime residentialmortgages totaling $290 million.Thissecuritization was the first and more need to follow because the MSAs with those higher loan limits mentioned earlier will be rolledback later this year.
Fortunately, buyersand lenders are starting to embrace the luxury home market again. Furthermore, investors are sticking their toes in the water and purchase securitized residential mortgage backed securities. If housing price stabilize, more investors and lenders will enter the market for the benefit of the consumer.
