Jumbo Trouble for Jumbo Mortgages

Jumbo mortgages have always carried slightly higher interest rates. These days, investors who stand behind those loans are especially skittish, and the rates they demand are extraordinary. As a result, these types of loans are currently in short supply.

Within the past 18 months, mortgage interest rates have risen, while huge problems have surfaced throughout the lending industry. One casualty of this troubled market is jumbo mortgages, which are becoming prohibitively expensive. The situation poses a serious challenge for America's top-tier housing market.

Jumbo jargon

"Jumbo" is used to describe a special class of mortgages that are exceptionally large. And this year-with so much turmoil in the mortgage industry-jumbo loans also describe a new wave of exceptionally big headaches for would-be borrowers. Currently, any mortgage loan larger than $417,000 is not considered "conventional" and falls under the heading of "jumbo." Borrowing in that loan category has always had a significant impact on consumers who want to finance or refinance a high-priced property, because jumbos charge higher rates of interest than their smaller counterparts. But brokers now report unprecedented spikes in jumbo rates. If you're shopping for this type of loan, don't be surprised if the rate you're quoted jumps as much as 50 percent in a single week. A borrower might, for example, apply for a jumbo mortgage expecting a rate of 8 percent, but within a matter of days, the rate could climb to 12 or 13 percent in reaction to a very nervous market.

Investor pool problems

The underlying problem is that the pool of investors who trade in jumbo mortgages is shrinking. Some have financial problems related to bad loan portfolios, others are putting their money into safer investments, and still others prefer to wait out the storm under an umbrella on the sidelines. So, at least for the time being, consumers looking to borrow jumbo loans have fewer options. That's why lenders feel compelled to charge a great deal more.

Attempted rescues

Without jumbo loans, pricey housing markets like California face severe shortages of working capital. Many homeowners who want to tap their equity or refinance out of costly adjustable-rate mortgages are unable to do so, because of a lack of reasonably priced jumbo loans to switch into from their existing mortgages. Fannie Mae and Freddie Mac-the two agencies that handle conventional loans-recently asked Congress for permission to increase their lending power by about 10 percent, so that they could take over part of the ailing jumbo loan market. But Fannie Mae and Freddie Mac are currently under scrutiny for questionable accounting practices, so it's unlikely that Congress will grant their wish anytime soon.

For the foreseeable future, we can expect the jumbo problem in jumbo mortgages to remain relatively unchanged-unless it gets even worse. The best advice for those in the market for a jumbo is to follow the example of investors: Wait patiently along the sidelines for things to improve, or seek out a less volatile loan than the jittery jumbo.