Relief on the Horizon for Jumbo Loans

Bank of America is riding to the rescue of the luxury housing market. Since the collapse last year of the private mortgage bond market, the upper-end housing market has been bereft of jumbo financing, or has been subject to punitively high interest rates and huge downpayment requirements. Since last fall jumbo loan rates often exceeded conventional financing by three to five percentage points, if the loan could be had at all. Bank of America and a few other lenders are now re-entering the lucrative jumbo loan market.

There is still no secondary buyers for jumbo loans on Wall Street but several major banks, led by B of A, will originate these large loans, at reasonable rates, for their own portfolios. This real estate segment has been the hardest squeezed by the credit crisis and the need for luxury loan product has gone largely unfilled for the last year. The fact that some major banks are launching a foray into jumbo loans with capacity in their own portfolios demonstrates that these banks have plenty of capital on hand.

The Washington Post reports that “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.” The minimum downpayment requirement is quoted at 20 percent. The loans will be originated through B of A’s retail network and through its subsidiary, Countrywide, acquired in 2008. In a wise marketing move, Contrywide will be rebranded as Bank of America Home Loans after April 27.

Bank of America's entry into the mass-market jumbo arena is a welcome relief to the luxury housing market. The lack of liquidity to this market segment has really hurt upper-end home prices, particularly in areas like California and areas on the East Coast where a large percentage of homes need jumbo financing.

Jumbo loans represent those mortgages with a loan balance that exceeds $417,000 which is the maximum loan amount that is accepted by Fannie Mae and Freddie Mac for purchase from the originating lender. There are some high cost areas that have a higher conforming loan limit (up to $729,750).

The Washington Post provides information on several other jumbo lenders who can provide higher loan limits than Bank of America:

“Several other financial institutions are also becoming more active in the jumbo loan market. 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 percent; Bank of America quotes a minimum 20 percent.

"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 interbank index for the balance of the 30-year term. Current rates start around 5 percent.

“San Diego-based Luxury Loans originates jumbo and "super-jumbo" mortgages of $3 million to $5 million and higher in 50 states for a handful of large commercial banks, who then put them in their investment portfolios. Victoria Johnson, CEO of Luxury Loans, declined to identify the banks that buy her mega-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 this country and as far away as Hong Kong. For a loan of $1.5 million to $2.5 million, MortgageBase wants a 40 percent down payment and liquid reserves of 50 percent of the loan amount to qualify for a 4.875 note rate on a 5/1 hybrid."'

These new non-Wall Street sources for jumbo loans are a welcome relief to the stressed housing market. The underwriting guidelines are more stringent than in past years, but the fact that there is once again a lending source for jumbos is very encouraging.

OK, let’s pop the champagne on this one.