Months after Congress moved to lower borrowing costs for homeowners in a number of high-priced housing markets, interest rates are finally becoming more attractive on certain types of so-called jumbo mortgages.
The shift could provide a boost to home sales, particularly in some markets including equestrian homes and Greenville Homes in North Carolina. But the number of borrowers benefiting from the program is likely to be limited.
Rates on jumbo loans -- those bigger than the normal $417,000 limit on mortgages that can be sold to government-sponsored investors Freddie Mac and Fannie Mae -- jumped over the past year. That's because investors, spooked by rising defaults, were reluctant to buy loans that weren't backed by Fannie, Freddie or the Federal Housing Administration. In some cases, jumbo loans weren't available at any rate, leaving borrowers in the nation's most-expensive housing markets in the lurch.
In an effort to provide some relief to borrowers, Congress in February passed legislation that temporarily raised the ceiling on loans that can be purchased by Fannie and Freddie or insured by the FHA to as much as $729,750 in certain areas.
The new program, which expires at the end of the year, has been slow to make a dent, in part because rates on the new "jumbo conforming" loans remained relatively high. (Conforming loans are those eligible for purchase by Fannie Mae and Freddie Mac.) But in recent weeks, prices for some jumbo-conforming loans have moved closer to those for similar conforming loans with smaller balances.
Rates on 30-year fixed-rate jumbo-conforming loans currently average 6.59%, compared to an average of 6.46% for similar loans with smaller balances. In March, the gap between rates on jumbo-conforming loans and the smaller loans was as much as 0.77 percentage point. Jumbo loans that don't fall into the new category remain expensive, with rates averaging 7.47%.
At J.P. Morgan Chase & Co., the volume of jumbo-conforming applications has doubled since prices began to fall in early May. For some California lenders, jumbo-conforming loans now account for as much as 25% of applications, says Pete Ogilvie, president of the California Association of Mortgage Brokers.
"It's definitely addressing a need in the market," Mr. Ogilvie says, adding that "most of the activity is in purchases, which is nice because it opens up the market for entry-level homes."
Overall, mortgage rates have been drifting upward. Rates on 30-year fixed-rate mortgages with smaller loan balances have risen by nearly half a percentage point in the past four weeks, according to HSH Associates. Some of the best deals, says Melissa Cohn, a mortgage broker in New York, come from so-called portfolio lenders, with some offering attractive rates for loans with even higher balances.
In recent years, high home prices have made jumbo loans a necessity for many homebuyers. In March 2007, before the credit crunch hit, jumbo loans accounted for more than 12% of loan applications, based on the number of loans, according to the Mortgage Bankers Association, with the share of jumbo loans much higher in many high-priced markets. The jumbo share stood at 6% in May, after falling to as low as 4.4% in March.
So far, the number of borrowers who've taken out the new higher-balance conforming loans remains small. Fannie Mae and Freddie Mac have purchased about $244 million of these loans, according to Inside Mortgage Finance, a trade publication.
An additional $348 million of high-balance FHA loans have been packaged into securities since Congress expanded the limits for the FHA program, which allows borrowers to get loans with down payments of as little as 3%, according to Inside Mortgage Finance. The FHA says it has more than $8 billion in additional loans in the pipeline. (The FHA defines high-balance loans as those above $362,790, the maximum homeowners in high-cost areas could borrow through the FHA program before Congress raised loan levels this year.)
The FHA program can be an attractive option for borrowers with little money for a down payment, mortgage brokers say. Rates on 30-year fixed-rate FHA loans currently average 6.44%. The FHA requires borrowers to purchase mortgage insurance, with an upfront payment equal to 1.5% of the loan amount and an annual 0.5% insurance premium.
Legislation to be voted on soon by the Senate would permanently increase the size of loans in high-priced markets eligible for purchase by Fannie Mae and Freddie Mac to 150% of the limit for conforming loans. Currently, that would be $625,500.
Pricing hasn't been the only obstacle for borrowers looking to take advantage of jumbo-conforming loans. The amount borrowers can finance was raised in 71 markets, with the highest loan limits in markets such as New York City, Northern Virginia, Los Angeles and San Francisco. In Boston, the limit was raised to $523,750, and in Baltimore to $560,000.
But those benefiting from the new loans are concentrated in coastal markets. The higher loan limits for conforming loans won't provide any benefit to borrowers in places such as Chicago or Scottsdale, Ariz., where the limits weren't increased, even though these markets contain pockets of high-priced houses. "If you have to go above $417,000 [for a loan], the house isn't going to sell," complains Steve Walsh, a mortgage broker in Scottsdale. "The jumbo-conforming loans don't help anyone."
Another obstacle: Some borrowers may not be able to meet the lending standards for these programs. Borrowers need to put at least 10% down under the Fannie Mae and Freddie Mac programs. The standards are even tougher for second homes, where they must put at least 40% down.
The restrictions on second homes have had "a tough impact on a lot of markets," says Joe Rogers, an executive vice president at Wells Fargo & Co. "It's an area where we'd like to see some help, if possible."
Home buyers are likely to find it easier to qualify than those seeking to refinance. Prices have fallen substantially in places such as California and Florida, which means that many borrowers who bought homes in the last few years have little or no equity.
"A lot of people feel this was too little too late to have significant impact," says Daniel Jacobs, chief executive of 1st Metropolitan Mortgage, a national mortgage broker based in Charlotte, N.C. "The counties that really should benefit from the increased loan limits are the very same counties that have experienced significant depreciation in home values." Because of falling home prices, many borrowers who might have had enough equity to refinance six or eight months ago are no longer able to, he adds.
There are also restrictions on cash-out refinancing, which can be an obstacle for some borrowers looking to pay off a home-equity loan or line of credit taken out after a mortgage. Freddie Mac, for example, requires that borrowers pulling cash out have at least 25% equity in their homes and limits the amount they can pull out to $100,000. It bars cash-out refinances for second homes or investment properties.
