While we still see a tightening of mortgage underwriting guidelines for many loan programs, or even an increase in costs associated with the FHA loan program, there has emerged an increased appetite for Jumbo Mortgages in the marketplace. Today, I’d like to discuss the “What?”, “Why?” and “How It Affects You?” of the evolving landscape.

Let’s begin with the “What?”:

1. There are really two categories of Jumbos. One lies within the existing Fannie Mae/Freddie Mac/FHA loan limits. It’s in the zone between the old loan limit ($417,000 in high cost areas) to the current loan limit ($729,250 in high cost areas). Often these loans are referred to as Non-Conforming. The second type of Jumbo is the loans that exceed the current loan limits….those above the $729,250 number. For the purpose of this discussion, there is little difference as to the changing market, but there is a difference in loan eligibility requirements and pricing.
2. When I refer to an increased appetite for these loans, I do not mean to say there is a lowering of qualifying standards. When we underwrite Jumbos, there are still firm guidelines as far as FICO scores, income ratios, down payment and reserve requirements. What we are seeing is that there are more people looking to lend on these loan products. More buyers of these types of loans (increased demand, more competition) have brought the cost of the loans down considerably (lower rates for borrowers).

Now to the “Why?”:

Historically, Jumbo loans perform well (which means their delinquency rates are low). With the stricter underwriting criteria, there is no reason to believe that won’t continue to be true.

While it is true that the call for Jumbos in the Mortgage Backed Securities world is still a bit lagging, many banks and other portfolio lenders are closing these loans and holding them in their own portfolio for primarily two reasons:

1. The rate of return is better than they can get elsewhere. Performing mortgages are delivering over a two percentage point return more than comparable treasury bills, for example.
2. When these loans prove their performance history, they will become more marketable in the MBS world. So when rates do climb in the future, these loans will be sold for a profit and the cash received will be reinvested in higher yielding products.

Finally, “How does this affect you?”:

With rates so attractive, homes are more affordable. Because Jumbo loans typically attract move up buyers (as opposed to first time buyers), the analysis of numbers can often demonstrate that home sellers can get a bigger or more expensive home for a manageable payment. That may even allow a home seller to accept a lower price on their current home to get into the new home NOW while rates are so attractive.