Jumbo mortgage rates experienced a jumbo increase when the meltdown in the mortgage market caused funding for these loans to dry up. But slowly, rates have fallen, as banks have been more willing to fund the loans.
Jumbos are defined as those mortgages too large for purchase by Freddie Mac or Fannie Mae — up to $417,000 for single-family homes in many markets and currently up to $729,750 in some high-cost areas.
By last summer, large lenders were launching jumbo lending programs for "top credit" borrowers, said Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association.
Banks held those loans in their portfolios, he said.
This year, banking companies including Wells Fargo & Co., Bank of America Corp. and U.S. Bancorp have gotten more aggressive in originating jumbos, said A.W. Pickel, president of LeaderOne Financial Corp., a mortgage lender in Overland Park, Kan.
"If you underwrite carefully and cautiously, a jumbo loan is a very good money maker for a bank," he said.
Last week Redwood Trust Inc., a Mill Valley, Calif., real estate investment trust, priced the first private securitization of newly originated mortgages since 2008. The $222 million of securities are backed by high-quality jumbo mortgages.
Keith Gumbinger, vice president of HSH Associates, a publisher of information on consumer loans, said that if investors have an appetite for this kind of debt, "we have a vehicle for banks to get loans off their books."
The improvement in jumbo rates also raises the question: Should the conforming rates be lowered now that the jumbo market has strengthened?
At the end of October 2008, the 30-year fixed-rate jumbo mortgage averaged 7.95% in one of Bankrate.com's weekly surveys. The spread between conforming and jumbo was at its widest during a week in mid-January 2009, when the jumbo 30-year fixed-rate mortgage averaged 7.07% and its conforming counterpart was 5.28%.
Last week the 30-year fixed-rate jumbo mortgage averaged 5.91% in the Bankrate survey, with the conforming 30-year fixed-rate mortgage averaging 5.22% — moving closer to a historically normal spread between the two products.
The higher conforming limits were put in place when rates on jumbos were high; it was a way to help some homebuyers who needed those bigger loans get them at conforming rates.
But with the spread between conforming and jumbo mortgages shrinking, some question whether the higher conforming limits should remain in place.
"Can we still make the claim that the private jumbo mortgage market is so crippled that jumbo borrowers cannot obtain a mortgage?" Gumbinger asked.
"That would seem unlikely, given a slow but steady improvement in portfolio lending and what could be perceived as a growing competitive environment characterized by near-record-low rates for 30-year fixed private-market jumbos.
"Do homebuyers and homeowners who can afford homes at two, three or even four times the median price really need 'subsidized' mortgages?"
Others say it's important that any changes to the limits do not come at the expense of a housing market recovery.
"This is not the time to take the tires off and put on a different set of tires," Pickel said.
Underwriting in the jumbo arena is still very strict. Down payments for these mortgages are usually 20% to 25% — and sometimes higher, Fratantoni said.