The word “Jumbo” is used in two contexts when referring to mortgage loans. True jumbo mortgages are loans at amounts higher than the limits set by Fannie Mae and Freddie Mac. The national maximum for the government sponsored loan investors is $625,500. With the exception of some FHA and VA loan products, any mortgage for higher than this amount would be considered a jumbo loan. The word “Jumbo" is also used for a special type of Fannie Mae and Freddie Mac product known as “jumbo conforming,” for certain high-cost counties.
Investment for Jumbo Loans
Because Fannie Mae and Freddie Mac will not insure financing for higher mortgage amounts, lenders offering these loans must get their funds from other sources. A bank can finance jumbo loans with its own funds (called portfolio lending), or the loans can be sold to outside investors on the secondary mortgage market. Large banks are more likely to have the capacity to offer jumbo loans through their portfolio. Smaller banks and lenders that are not part of a full-service bank usually will not have this ability. This is where the secondary mortgage market comes in as a funding source.
History of Jumbo Financing
Before the housing crisis of 2008-2009, private equity investment in mortgages was common. In the case of jumbo loans, lenders bundled a group of loans that met certain specifications and sold the bundles as a mortgage backed security in the market. This sale worked the same way other bond funds are bought and sold on the market. However, after the crisis, investors no longer wanted their capital to be exposed to the mortgage market. Even though sub-prime loans were the cause of the initial problems, jumbo loans were perceived by many to be an equal risk. Thus funding sources became very difficult for jumbo loan amounts. Those needing higher mortgage balances were either unable to get a mortgage, or were forced to pay exorbitantly high interest rates.
Jumbo Conforming Loans
“Jumbo conforming” loans, which are offered by Fannie Mae and Freddie Mac in certain high-cost counties, filled part of the void for higher mortgage amounts. Fannie and Freddie’s national loan maximum is $417,000. The best interest rates will be available at or below this loan amount. In high cost areas, Fannie and Freddie will lend up to an established county maximum (with $625,500 being the highest level). Rates are slightly higher for “jumbo conforming” loans, and underwriting guidelines are stricter.
Private Capital Returns to Mortgage Markets
Fortunately, true jumbo loans are becoming more readily available again. President Obama has made it a priority to lower the federal government’s role in the mortgage business, returning some of the burden to private capital. Jumbo loans are one of the first ways that is happening. Buyers of homes at prices too high for a conforming loan have more options now than even six months ago. If they have good credit and sufficient income to support the loan payments, jumbo loans should be available, even if they do not have 20 percent available for a down payment.
With more than a decade of experience, Gregory Erich Phillips is a trusted expert on real estate and mortgage financing. As an author, Phillips is known for his writings on economics, personal finance, religion, politics and culture.