Jumbo mortgages are larger-than-normal mortgages that are used to pay for, or refinance, higher-cost homes. The Federal Housing Administration (FHA) began insuring these big loans this year, at least on a temporary basis, as part of the government's much-touted economic stimulus package.

Effective March 6, 2008, the Department of Housing and Urban Development (HUD) began to offer temporary FHA jumbo loans in amounts as high as $729,750 for buyers in the most expensive real estate markets. Previous FHA loan limits topped out at less than $363,000, and that was frustrating to buyers who wanted to pay for homes in markets that have seen dramatic price inflation. The lower caps on loans also prevented many homeowners from using FHA-backed loans to refinance. Many who want to refinance are doing so now because they have troublesome loans in amounts that far exceed those relatively low limits. The policy changes were authorized under the new Economic Stimulus Act of 2008, and the legislation gives permission to the FHA to insure jumbo loans and provide much needed liquidity and stability to housing markets throughout the U.S.

Nothing but interest...and regrets

FHA loans fell out of favor during the early years of the 21st century, because lenders were offering a variety of mortgage products that appeared to be competitively priced compared to "old school" FHA loans. Lenders offered 100 percent financing, super attractive "teaser" terms at irresistible rates of interest, and the chance to buy a home and pay nothing but interest. Lots of consumers used those exotic loans for short-term convenience and savings, and quickly sold the homes and repaid their loans for profits before buying even more expensive properties. But millions also got caught holding the bag when rates spiked, home prices fell, and an epidemic of foreclosures began. Hard times and bankruptcies replaced easy money and overnight millionaires.

Staging an FHA comeback

These days, however, FHA products are experiencing a big comeback, as borrowers look for a lower cost alternative to the rising prices of typical non-insured loans. As banks and mortgage companies tighten their underwriting standards, more borrowers face rejection, or higher rates and heftier down payments. But the FHA specializes in providing affordable loans with exceptionally low down payments.

The FHA also created a new refinancing initiative known as FHA Secure. The program helps distressed homeowners jettison those pesky subprimes in favor of fixed-rate loans. This program has saved thousands of homes from foreclosure by enabling the smart strategy of dumping bad loans for more manageable and affordable ones.

Meanwhile, the private market for jumbos has almost evaporated, because they carry much of the same risk to investors that's associated with subprimes. For a while, borrowers with jumbo loans had no place to turn. Then, Congress authorized Fannie Mae to deal in jumbos, and simultaneously let HUD-through its FHA department-insure them for those who qualify. The changes, though temporary, have allowed many consumers to breathe a sigh of relief.

Published on June 28, 2008