In March 2009, there were reports of lenders getting back into the jumbo loan business (this time for their own investment portfolios and not for bond traders on Wall Street):

Bank of America, the country’s largest mortgage lender, is rolling out a large program to finance jumbo loans between roughly $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5 percent range.

According to Inside Mortgage Finance, the jumbo sector showed signs of life in the second quarter of 2009 with Bank of America and Citigroup leading the way. Home-Account (the mortgage-finding service with a little twist) noted on its blog last week, “Welcome back jumbo. Too bad most of us can’t qualify.” They explained there’s a catch if you need one of these loans today (which is still most of coastal California):

Want a jumbo loan? Then be ready to make a 30-40 percent down payment on your new house.  This immediately eliminates refinancing most of the older jumbo loans in California, for example, where more than half of the mortgages were already of jumbo size. If your jumbo mortgage is underwater don’t expect to be able to refinance — or even to apply for a mortgage modification, since the Obama plan, for example, doesn’t even cover jumbos.

So if few people can qualify, then why are lenders getting back into this business. The above post explains:

The reason lenders are jumping into jumbo mortgages is because under these terms it is a great business. Wall Street still won’t touch jumbos for securitization, but that doesn’t matter because the banks are tending to hold these loans in their own portfolios. And for good reasons:

1) the lenders have plenty of equity down so the properties are worth more than the loans against them;
2) it costs little more to foreclose on a jumbo than on a conventional loan so for the lender the downside is the same while the upside is much larger, and;
3) under current Fed policy the banks are making these 6-percent jumbos with 0.25-percent money — a fantastic spread by historical standards.

Other resources:

  • Here’s a good video on Bloomberg that discusses the outlook of the mortgage market and jumbo loans in particular.
  • Here is a recent paper from the National Association of Realtors on the impact of the jumbo mortgage credit crunch.

Anyone in California or New York City have a story to share about their need for a jumbo loan or trying to refinance one?

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