Jumbo Mortgages making a Comeback

Banks fled from jumbo mortgages last year as the mortgage crisis began to take its toll on their balance sheets and defaults on jumbos accelerated.  Now, however, they're back in the jumbo market and lending to customers in need of these extra large home loans at reasonable rates.

Jumbo mortgages-loans that are too large to be covered by conventional loans limits-are essential to many buyers in pricier regions of the U.S., like Hawaii and California. But when the subprime crisis started, jumbo mortgages became scarce. These large money loans, which are usually provided by private investors as opposed to conventional mortgage banks, disappeared from the lending arena when the mortgage crisis began. The interest rates on jumbo loans practically doubled overnight, making it virtually impossible for anyone to finance a more expensive home.

Jumbo mortgage banks to the rescue

Now, however, some major banks are aggressively moving into the jumbo mortgage market as a way to boost profits in their own portfolios. The nation's largest mortgage lender is Bank of America, thanks in large part to its acquisition last year of Countrywide Mortgage. Recently, Bank of America led the way with plans to finance jumbo mortgages that range from about $730,000 to $1.5 million. The mortgage bank is already offering fixed-rate 30-year jumbo mortgage loans with competitive rates that hover below 6 percent.

Fannie, Freddie back jumbos, too

The limit on loans offered through Fannie Mae and Freddie Mac was adjusted upward from $417,000 to $625,500 about a year ago, in recognition of the fact that home prices have experienced dramatic inflation over the past decade. But Congress then hiked the ceiling to $729,750 for especially high-priced regions of the country, in order to offset the negative economic impact of the credit crisis and a serious lack of funding for jumbo mortgages. With the passage of the recent economic stimulus package, those Fannie Mae, Freddie Mac, and FHA loan limits have been authorized through the end of 2009. But private sector players, including Bank of America and the Dutch mortgage bank ING Group, are trying to capture a strategic market share for jumbo mortgages.

Mortgage bank requirements

Bank of America's new program involves stringent guidelines and hurdles, so that anyone considering a jumbo mortgage loan should be prepared to show sufficient cash reserves and income to enable them to make house payments-including property taxes and insurance-for at least six months. A high credit score, a 20 percent down payment, and verifiable home appraisal valuations are also standard prerequisites for anyone who applies for these jumbo mortgages.

While some private lenders worry that the presence of major mortgage banks in the jumbo mortgage industry will push smaller lenders aside, the big banks see their actions as good for consumers. They say that they'll bring more competitive pricing, coupled with the financial clout to provide reliable cash liquidity and avoid a repeat of the jumbo mortgage credit freeze.