Jumbo Loans Could Make a Comeback

Luxury home sales could rise if rates lower for jumbo loans. But lenders are going to be stricter than ever

By Prashant Gopal

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It soon might become easier again to buy a house worth $1 million or more.

That's because, despite the bruising that the luxury home market has taken over the past 12 months, rates for jumbo mortgages could finally fall to more affordable levels.

"We are actively pursuing more jumbo loans," said Vijay Lala, product executive for Bank of America (BAC). "We think they are a good asset for banks."

The average rate for a jumbo loan is still substantially higher than for "conforming loans," which are loans guaranteed by a federal mortgage agency that typically top out at $417,000, but can be as high as $729,750 in certain high-cost markets. The average interest rate for a jumbo loan, which unlike conforming loans aren't federally guaranteed, has dropped from a high of 7.9% at end of October to 6.63% last week. That is the lowest average rate since the end of 2007, according to financial publisher HSH.com in Pompton Plains, N.J. Of course, that's still well above the average rate of 5.07% for the smaller conforming mortgage. But the Federal Reserve's announcement on Mar. 18 that it would purchase an additional $750 billion of mortgage-backed securities backed by Fannie Mae (FNM) and Freddie Mac (FRE), and buy as much as $300 billion in Treasury securities, has raised hopes that interest rates will continue to fall.

Bank of America, which is offering jumbos through its retail branches and through its Countrywide Home Loans subsidiary, says its average rate for a 30-year fixed jumbo loan this year is 5.875% with a fee equal to 1% of the mortgage. But the underwriting requirements—as with other lenders in the luxury lending market—are strict. Borrowers need a down payment of at least 20%, a credit score of above 720, full financial documentation, and at least six months of cash reserves.

Good News for High-End Borrowers

Some wealthy buyers might have a little less money to spend on real estate if Congress passes a measure to tax heavily the bonuses for wealthy employees of banks that received taxpayer bailout money. The House passed a bill on Mar. 19 that would impose a 90% tax on bonus money. The Senate is considering a similar proposal.

Still, the news is good for qualified borrowers in expensive markets such as Boston, New York, and Washington and in states such as California and parts of Florida where many homes require loans larger than those Fannie Mae, Freddie Mac, and the Federal Housing Administration are permitted to buy. The median home in Manhattan, for example, was $955,000 in the fourth quarter of last year, meaning that half of homes sold for more than that, according to New York appraisal firm Miller Samuel.

The limit for conforming loans in most of the country is $417,000. Congress temporarily raised that limit to as much as $729,750 in the highest-cost markets, including Manhattan. But people needing larger mortgages have had a shrinking number of options since last year, when the secondary market for jumbo loans essentially dried up. Investors are no longer eager to buy mortgage-backed securities tied to loans that aren't guaranteed by the federal government. Few lenders can afford to keep such large loans on their balance sheets, and interest rates have climbed. But the federal government's injection of capital into a number of large banks has given them more money to lend. And for some, jumbo loans seem to be a good option.

"Some of the major lenders have gotten their act together and said: 'We can make serious money on the jumbo market and make it into a competitive business,'" said Guy Cecala, publisher of InsideMortgageFinance.com in Bethesda, Md., a mortgage industry newsletter.