New money is about to flow into an area of the real estate market that has been hardest squeezed by the credit crisis: mortgages too large to be purchased or backed by Fannie Mae, Freddie Mac or the Federal Housing Administration.
Though the so-called jumbo mortgages are heavily concentrated in California, portions of Florida and the Northeast, higher-cost neighborhoods throughout the country traditionally have depended on their ready availability to finance houses. But with the collapse last year of the private mortgage bond market on Wall Street, home buyers, builders and refinancers who relied on jumbo financing were left with few sources -- except at punitively high interest rates and huge down payments.
That's about to change. Major banks are heading into the jumbo segment, originating big loans at affordable rates -- not to then sell to Wall Street bond traders but to keep in their own investment portfolios.
Bank of America, the country's largest mortgage lender, is rolling out a large program to finance loans between about $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5% range. The loans will be available through the bank's retail network and through its Countrywide Home Loans subsidiary. After April 27, Countrywide will be re-branded -- shedding the name it's had since 1969 -- and morph into Bank of America Home Loans. Bank of America acquired Countrywide in 2008.
Barbara Desoer, the bank's head of consumer real estate operations, said there's "a real need" for capital in the jumbo arena, where interest rates last fall sometimes exceeded conventional loan rates by three to five percentage points -- if financing was available at all.
Traditionally, jumbo loans have been defined as any home mortgage whose principal amount exceeded Fannie Mae's or Freddie Mac's statutory high-cost market purchase limit. Most recently that ceiling was $625,500, up from $417,000. But in 2008, Congress temporarily raised the upper limit in high-cost areas for both companies and the FHA to $729,750. In the economic stimulus legislation passed by Congress last month, that maximum was extended through Dec. 31 of this year.
Though it will almost immediately become the biggest player in the jumbo loan segment, Bank of America will not be alone. With little fanfare, other financial institutions have become more active. For example, ING Group, an Amsterdam-based banking and insurance conglomerate, offers jumbos as large as $2 million through its online ING Direct unit. The minimum down payment for an ING Direct jumbo is 25%; Bank of America quotes a minimum of 20%.
ING's jumbos typically are "5/1" and "7/1" hybrids, with a fixed interest rate for the first five or seven years, followed by an adjustable rate tied to the LIBOR inter-bank index for the balance of the 30-year term. Current rates start around 5%.
San Diego-based Luxury Loans originates jumbo and "super-jumbo" mortgages of $3 million and higher in 50 states for a handful of large commercial banks, which then put them in their investment portfolios.
Victoria Johnson, chief executive of Luxury Loans, declined to identify the banks that buy the biggest loans but said their underwriting standards can be rigorous. For example, some investors want proof of substantial cash reserves -- at least six months of borrower income -- deposited even when down payments are substantial.
Bank of America's new program requires hefty liquid resources -- six months of principal, interest, property tax and insurance payments in reserve -- plus fully documented income, solid credit scores and a full appraisal.
In Fort Collins, Colo., Brian Shaver, senior loan officer for 1st City Mortgage Group, originates jumbos through MortgageBase.com, selling them to banks in the U.S. and as far away as Hong Kong. For a loan of $1.5 million to $2.5 million, MortgageBase wants a 40% down payment and liquid reserves of 50% of the loan amount to qualify for a 4.875% note rate on a 5/1 hybrid.
Johnson says she welcomes Bank of America's entry into the mass-market jumbo arena. "We need them," she says, "there's been a really serious lack of liquidity at this end of the market," which has hurt home prices throughout California as well as parts of the East Coast.
"The more competition the better," she says. Properly underwritten, with solid down payments, large reserves and high credit scores, "jumbos are probably a smart move" for large and small banks that have capacity in their portfolios, she says.
Bottom line: If you've been postponing a purchase, sale or refi because the loan amount you need is too big for Fannie, Freddie or FHA, check out the new, non-Wall Street sources of jumbos.