Future of Conforming Jumbos Uncertain

Jim Morrison, the legendary voice of the Doors, made pessimism cool among fast crowds when he sang, “the future’s uncertain and the end is always near.” Now, 40 years later, 21st century home shoppers can relate to his negativity. The jumbo conforming mortgage, created during the heart of the real estate crisis, may be facing its final days.

Consequence of crisis

Just a few years ago, mortgages could be categorized into two basic buckets: conforming and non-conforming. The former carried lower interest rates, because they qualified for backing by mortgage securitizers Freddie Mac and Fannie Mae. While various circumstances might cause a proposed mortgage to be deemed non-conforming, one predominant issue was the size of the loan. Prior to 2008, conforming mortgages had a maximum loan amount of $417,000. Anything larger was called a jumbo.

When the financial crisis hit, the availability of these jumbo mortgages dried up, delivering another blow to the real estate market. To counter that blow, then-President George Bush raised the conforming limit significantly in 2008, to $729,750. The hope was that lenders would accept the increase and begin offering low-priced, high-limit mortgages.

Conforming jumbo mortgage is born

Ah, the best laid schemes of mice and G-men. That’s not what happened at all. Instead, lenders continued to charge more for loans larger than the old conforming limit of $417,000. Hence, a new bucket of loans was established: the conforming jumbo. These mortgage loans are made in amounts greater than $417,000, but not more than $729,750. Backed by Fannie Mae and Freddie Mac, conforming jumbos are cheaper than true non-conforming loans, but not as cheap as conforming loans in amounts less than $417,000.

Concerns for homeowners, homebuyers

The higher conforming loan limit was initially designed to phase out at the end of 2008. But it was extended by Congress, and is now facing expiration on December 31, 2010. There’s no definitive word on whether lawmakers intend to push through another extension. 

Should the limit revert to its previous level, individuals interested in buying property in expensive neighborhoods could find themselves in a bind. While there are some lenders operating in the non-conforming space, the underwriting is pretty strict. Homebuyers should expect to be thoroughly investigated in the qualification process, as lenders check and recheck income, assets, and credit history. Loan terms will be restrictive as well; big down payments, higher rates, and conservative maturities will be the norm.

Homeowners of high-priced properties would also be impacted. Those who need to sell could face a long and cumbersome search for qualified buyers. Lenders may shun homeowners who need to refinance, unless they have substantial home equity.

Only lawmakers can predict if the “end is near” for conforming jumbos. The safest bet for homeowners and homebuyers is to expect conforming jumbos to disappear in 2011, and plan accordingly. The future really is uncertain, particularly when it comes to oversized mortgage loans.