Jumbo Mortgages Making a Comeback

A "Jumbo" mortgage is defined as a loan that is too large to be bought by Freddie Mac or Fannie Mae. Depending on the state, limits range from just under $420,000 to $730,000.

When the credit crisis was at its peak, jumbo mortgages were hard to find. Lenders looked at them as an unecessary risk and these mortgages were down 70% in 2008 from prior years. Now that the dust has cleared, some companies are considering the jumbo mortgage market a new opportunity. As mortgage rates continue to drop, so do rates for 30-year jumbo mortgages.

Recently Bank of America began publicizing a program offering 30-year fixed rate mortgages with interest rates in the upper 5% range. ING Direct has been offering jumbo loans in the for close to 5% for several months.

Guy Cecala, publisher of Inside Mortgage Finance claims that the Bank of America rates are lower than main competitors Wells Fargo, J.P. Morgan Chase and Citibank, and that it won't be long before others will be jumping on the bandwagon. He was right.

First Internet Bank just announced a "hybrid" adjustable-rate mortgage with a fixed rate for five or seven years (may be reset annually to an adjustable rate), with an interest rate of 5.375%, with no points.

GMAC is also advertising competitive jumbo loans where the initial required payment is 20 to 30 percent, unlike those during the boom that were offering 100 percent of the home's value. As a recipient of funds from the Obama bailout plan, GMAC is modifying between 7,000 and 10,000 loans per month; a possible 100,000 by the end of the year. ResCap Chief Executive Officer Thomas Marano estimates that jumbo loans may increase from 5 percent to 15 percent of the company's volume over the next year.

He commented, “You have an opportunity to originate jumbos the way they were originated 5 to 10 years ago, where the borrower had some real skin in the game,” Marano said. “We’re originating some of the highest-quality jumbos that I’ve seen in the past 10 years."

Keith Gumbinger, Vice President for HSH, comments that jumbo loans don't get the same number of institutional buyers as do regular loans, as a result, when money is tight, jumbos aren't offered as freely. Today many investors are transfering their assets from the stock market to more stable investments, whereby increasing the bank's cash flow and enabling them to offer more loans. In addition, many lenders are receiving support from the federal government and the low interest rates are prompting more home owners to refinance.

Instead of many small loans with quick turnarounds, a jumbo loan gives the bank a long term asset with a 6 to 7% return.

The requirements for jumbo mortgages vary from lender to lender, and are definitely much tighter than in previous years. Bank of America requires a minimum downpayment of 20% (or 20% home equity on a refinancing), a 720 credit score or higher, and six months of reserves in the bank. ING requires a minimum of 25% down.

Like any mortgage, shop around for the best deals, comparing all the fees and costs associated with each.