At 9 a.m. on July 6, Sotheby's Lehman Mortgage Services got a call from a desperate client.

Her newly bought $2 million property in the Hamptons on New York's Long Island hung in the balance.

Though the buyer had won the deal after a fierce bidding war, her preapproved $1.5 million mortgage, laden with conditions, was suddenly unacceptable to the seller. She needed a new mortgage, fast.

"She gave us the name of her accountant, and at 11 o'clock in the morning, after a few rounds of faxing, she had a hard commitment with no conditions. That allowed her to win the contract," said Peter Ferrara, president of the joint mortgage venture formed last month by Sotheby's International Realty and Lehman Brothers.

While a $1.5 million mortgage might be out of reach for many homebuyers, it is closer to the norm than ever before.

Eight years of a booming economy have left few industries untouched, and the real estate and mortgage businesses have hardly been an exception.

While the conforming limit - the maximum size for a loan to be eligible for purchase by Fannie Mae and Freddie Mac - is $252,700, mortgage and real estate professionals say that mainstream mortgage loans have moved well above that. Jumbo loans - those too big for the government-sponsored loan buyers' guidelines - are quickly becoming routine.

"A loan now up to $500,000 is almost considered conforming," said Doug W. Naidus, chief executive of MortgageIt.com, a lender in New York.

"Signing authorities of the underwriters at the major banks have been raised to that level. It's just commonplace now," said Mr. Naidus, who is also chairman of IPI Skyscraper Mortgage, a jumbo broker and lender in Manhattan.

At Countrywide Credit Industries, the largest independent mortgage company, jumbo loans accounted for 22% of originations in the fiscal year that ended in February, up from 6% four years earlier, a spokeswoman said.

Mark Zandi, chief economist at RFA Dismal Sciences, an economic research firm in West Chester, Pa., said it is clear that the jumbo market has grown significantly, "because house prices have grown 5% annually over the last five years."

"More importantly," Mr. Zandi said, "in markets where jumbo lending is more prevalent, appreciation has been even greater. In California, house price gains have been double-digit annually, and in the Northeast price growth has been in the high single digits."

Katherine August-DeWilde, chief operating officer and executive vice president of First Republic Bank in San Francisco, which specializes in jumbos, said $750,000 "is now a mainstream loan."

Of course, the bigger the loan, the more money at risk, and stratospheric home appreciation rates have some lenders worried that a correction would leave them with loans that are suddenly undercollateralized.

But jumbo specialists say they are confident in their underwriting. And despite a recent cooling of the home sales market, the frenzied buying of the last two years has pushed prices high enough that even a flattening or a slight retreat will keep them at historically high levels, real estate and mortgage professionals said.

As a result, the potential market for jumbo loans has grown dramatically over the last three years. Prices in the high end of the housing market have increased steeply since 1997 after more than a decade of slow but steady growth, according to a luxury home index tallied by First Republic Bank.

From March 1994 to March 1997, for example, the average price of luxury homes in eight counties in the San Francisco Bay area increased 7%, to $1,139,787. But from March 1997 to March of this year, average prices in those areas increased 60%, to $1,826,029. In the last year alone the average price increased 25%.

Moreover, the last 60% increase in the home index occurred from March 1987 to March 1997.

Stuart N. Siegel, president and chief executive of Sotheby's International Realty, said there have been similar increases over the last year for the homes he sells, which now carry an average price tag of $1.6 million. "And that kind of growth is seen throughout our industry," he said.

Lenders are rising to the occasion, though only up to a point. Ms. August-DeWilde said the playing field for mortgages from the conforming limit to $1 million is saturated with lenders, reflecting demand throughout that range. "The lower the loan amount, the more competition there is" in that range, she said.

Nonetheless, she said, the market for super-jumbos, mortgages over $1 million, has never been very competitive.

Sotheby's Realty, which lists many properties that sell for more than $8 million, has found that a growing number of luxury home buyers have few lenders they can borrow from.

To address the problem, Sotheby's and Lehman formed the joint venture, which specializes in jumbo and super-jumbo mortgages. The companies hope the venture will improve the lending process for clients.

"Customers of Sotheby's were saying that it was difficult for them to get financing," Mr. Ferrara said. "And when they finally did get it, they weren't happy with the process."

Part of the problem stems from the special attention that many of the high-end borrowers require, as well as the unusual structures of many super-jumbo loans. Officials at Sotheby's Lehman Mortgage said jumbo borrowers demand fast turnaround and superb service.

Meeting those high expectations is a challenge, because each jumbo deal can look completely different from the next.

In addition to saving the Hamptons deal, Sotheby's Lehman Mortgage recently secured a loan for a woman while she toured Europe, and helped a Northeastern buyer purchase a co-op in Florida. Mr. Ferrara said the Florida real estate professionals involved in the purchase did not understand how to put the co-op deal together.

Then there are the risk factors. Some in the mortgage industry cautioned that the real estate cycle may have peaked this summer, as many lenders, who fear property values could drop and threaten a lender in the event of a default, are growing wary of making loans bigger than $3 million.

One jumbo specialist in California, who did not want to be identified, called the Sotheby's-Lehman venture a "smart plan," but said a pervasive caution exists among jumbo lenders today.

"A number of lenders are taking a look at the amount of appreciation that has occurred and taking that into consideration when deciding whether or not to offer an approval," the California lender said. "People are starting to feel that we're at the end of the cycle and questioning whether they want to be writing these loans."

However, jumbo-market boosters like Ms. August-DeWilde say their loans are based primarily on an individual's ability to repay, not the property value.

"It doesn't matter what someone pays" for a home, she said. "It only matters how the loan is financed and whether it makes sense in each individual situation."

Jumbo lenders must be aware of the client's balance sheet, credit, character, liquidity, and ability to pay, in addition to the value of the real estate, she said.

Mr. Siegel said that, unlike the inflated real estate market of the 1980s, which eventually collapsed, today's borrowers are not engaging in real estate speculation or overleveraging.

Besides, Edward J. Meylor, chief executive of Lehman Brothers Bank, said Sotheby's Lehman Mortgage will not retain the credit risk from its originations; it plans to sell the loans to a depository owned by Lehman, which in turn plans to repackage most of the mortgages into securities and sell them to investors.

However, Lehman will take on another type of risk. Mr. Ferrara said Lehman Brothers Holdings plans to retain the servicing rights, the job of collecting loan payments from borrowers and remitting them to the bondholders. If borrowers pay the loans back early, the servicing fees will be cut short.

That is an especially acute risk with jumbos, which by their nature carry a higher prepayment risk than their conforming cousins. A 50-basis-point decline in interest rates, for example, would make it more worthwhile for a borrower holding a $1 million mortgage to refinance than for someone with a $200,000 conforming loan.

Mr. Ferrara dismissed the prepayment concerns. "In the event of a prepayment, they'll lose out on servicing fees, but on a loan-by-loan basis, it's not significant," he said.

"Larger loans pay off faster, yes, but we're not going to be exposed to that because we are securitizing the loans."

Some see limits to the opportunities for jumbo lending, in spite of a robust economy. A large amount of wealth has been created in the last decade, and many more borrowers are paying cash for their luxury properties.

"Less people mortgage today than before, particularly in the jumbo market, simply because there is more cash around," said Neil Bader, chief executive of IPI Skyscraper. "The higher the rates go, the less people will take advantage of the mortgage money."

But others argue that savvy investors will continue to take out mortgages - though they could pay cash - because their money can work better for them elsewhere. Mr. Siegel said it would not make sense for his wealthy clients to tie up their money in their homes when it could be invested more profitably.

"If you're borrowing at 8%," he said, "chances are, if you're some Wall Street smart guy, you could be doing better than prime" from your investments.


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