Jumbo mortgages
Encyclopedia
In the United States
, a jumbo mortgage is a mortgage loan
in an amount above conventional conforming loan
limits. This standard is set by the two government-sponsored enterprise
s Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages. When FNMA and FHLMC limits don't cover the full loan amount, the loan is referred to as a "jumbo mortgage". The average interest rates on jumbo mortgages are typically higher than for conforming mortgages.
, the limit is $417,000 for most of the US, apart from Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where the limit is $625,500.
On February 13, 2008 President George W. Bush
signed the Housing and Economic Recovery Act of 2008
which temporarily increased the conforming limit in the United States. The limit was raised to $729,750 or 125% of the median home value within the metropolitan statistical area, whichever is the lesser. Initially due to expire in December 2008, the new limits have been extended through 2010. Mortgage lenders have not freely adopted these new limits, making them essentially "theoretical", as mortgages above the old conforming limit of $417,000 still attract higher interest rates.
On October 1, 2011 the amount of $729,750 was reduced to $625,500.
from jumbo loan seekers. Jumbo home prices can be more subjective and not as easily sold to a mainstream borrower, therefore many lenders may require two appraisals on a jumbo mortgage loan.
It can be more expensive to refinance a jumbo loan due to the closing costs. Some lenders will offer the service of an extension and consolidation agreement, so that a jumbo refinancer will not have to pay for mortgage tax again on the same principal balance. In other cases, title insurance companies will offer up to a 50% discount, often required by law for those refinancing within 1 year to 10 years. The largest discount is for refinancing within one year.
Some consumers seeking a jumbo mortgage choose to seek advice from a competent professional familiar with jumbo mortgage loans.
, there was a large increase in the number of jumbo loan applicants. Due to rising prices, many consumers had to take out jumbo mortgages in order to buy modest homes in big-city areas; this option was no longer limited to high-end luxury residences.
Many of these new loans were 40- or 50-year amortization, or had an interest-only option, similar to subprime loans. They meant that the jumbo loan borrower would pay the loan back over a longer period of time, or could defer any repayment of principal for a few years (thereby also increasing the total amount to be paid back).
However from 2007, as prices fell and the number of foreclosure
s rose, lenders turned away from providing jumbo mortgages. Lenders that did remain in the jumbo loan market increased rates sharply, with rates up to 1.5 percentage points higher than for conforming loans. This withdrawal from the market led to a lack of lending available to fund the purchases of expensive homes, thus putting further downward pressure on house prices and completing a vicious circle
.
The delinquency rate on jumbo loans rose dramatically, tripling over the course of 2009, and by February 2010, almost one in ten jumbo mortgages were 'seriously delinquent' (i.e. in arrears by at least 60 days).
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a jumbo mortgage is a mortgage loan
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
in an amount above conventional conforming loan
Conforming loan
In the United States, a conforming loan is a mortgage loan that conforms to GSE guidelines.In general, any loan which does not meet guidelines is a non-conforming loan...
limits. This standard is set by the two government-sponsored enterprise
Government-sponsored enterprise
A government-sponsored enterprise is a financial services corporation created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent...
s Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages. When FNMA and FHLMC limits don't cover the full loan amount, the loan is referred to as a "jumbo mortgage". The average interest rates on jumbo mortgages are typically higher than for conforming mortgages.
, the limit is $417,000 for most of the US, apart from Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where the limit is $625,500.
On February 13, 2008 President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
signed the Housing and Economic Recovery Act of 2008
Housing and Economic Recovery Act of 2008
The Housing and Economic Recovery Act of 2008 designed primarily to address the subprime mortgage crisis. It authorized the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed rate mortgages for subprime borrowers if lenders write-down principal loan balances to 90...
which temporarily increased the conforming limit in the United States. The limit was raised to $729,750 or 125% of the median home value within the metropolitan statistical area, whichever is the lesser. Initially due to expire in December 2008, the new limits have been extended through 2010. Mortgage lenders have not freely adopted these new limits, making them essentially "theoretical", as mortgages above the old conforming limit of $417,000 still attract higher interest rates.
On October 1, 2011 the amount of $729,750 was reduced to $625,500.
Risk
Jumbo mortgage loans are a higher risk for lenders. This is because if a jumbo mortgage loan defaults, it may be harder to sell a luxury residence quickly for full price. Luxury prices are more vulnerable to market highs and lows in some cases. That is one reason lenders prefer to have a higher down paymentDown payment
Down payment is a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the initial upfront portion of the total amount due and it is usually given in cash at the time of finalizing the transaction.A loan is then required to make the full...
from jumbo loan seekers. Jumbo home prices can be more subjective and not as easily sold to a mainstream borrower, therefore many lenders may require two appraisals on a jumbo mortgage loan.
Costs
The interest rate charged on jumbo mortgage loans is generally higher than a loan that is conforming, due to the higher risk to the lender. The spread, or difference between the two rates, depends on the current market price of risk. While typically the spread fluctuates between 0.25 and 0.5%, at times of high investor anxiety, such as August 2007, it can exceed one and a half percentage points.It can be more expensive to refinance a jumbo loan due to the closing costs. Some lenders will offer the service of an extension and consolidation agreement, so that a jumbo refinancer will not have to pay for mortgage tax again on the same principal balance. In other cases, title insurance companies will offer up to a 50% discount, often required by law for those refinancing within 1 year to 10 years. The largest discount is for refinancing within one year.
Some consumers seeking a jumbo mortgage choose to seek advice from a competent professional familiar with jumbo mortgage loans.
Role in US housing bubble
As house prices rose as part of the United States housing bubbleUnited States housing bubble
The United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...
, there was a large increase in the number of jumbo loan applicants. Due to rising prices, many consumers had to take out jumbo mortgages in order to buy modest homes in big-city areas; this option was no longer limited to high-end luxury residences.
Many of these new loans were 40- or 50-year amortization, or had an interest-only option, similar to subprime loans. They meant that the jumbo loan borrower would pay the loan back over a longer period of time, or could defer any repayment of principal for a few years (thereby also increasing the total amount to be paid back).
However from 2007, as prices fell and the number of foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
s rose, lenders turned away from providing jumbo mortgages. Lenders that did remain in the jumbo loan market increased rates sharply, with rates up to 1.5 percentage points higher than for conforming loans. This withdrawal from the market led to a lack of lending available to fund the purchases of expensive homes, thus putting further downward pressure on house prices and completing a vicious circle
Virtuous circle and vicious circle
A virtuous circle and a vicious circle are economic terms. They refer to a complex of events that reinforces itself through a feedback loop. A virtuous circle has favorable results, while a vicious circle has detrimental results...
.
The delinquency rate on jumbo loans rose dramatically, tripling over the course of 2009, and by February 2010, almost one in ten jumbo mortgages were 'seriously delinquent' (i.e. in arrears by at least 60 days).
External links
- The Jumbo Mortgage Business is Growing - PBS Nightly Business Report with Susie Gharib - May 12, 2010.
- "Jumbo Loans Easier To Find" - The Wall Street Journal - April 30, 2010, Article Headline: "Jumbo Loans Easier to Find" - The Wall Street Journal
- New Loan Changes Bring No Relief -- retrieved Apr 13 2008
- Housing & Lender Information
- Fannie Mae Loan Limits