Not So Jumbo

Helping Mid-Tier Buyers Into More Affordable Loans

The federal government's efforts to make "jumbo" mortgages more available to borrowers have created a three-tiered mortgage market in areas with expensive housing, including the Washington region.

There are the standard loans that Fannie Mae and Freddie Mac buy from lenders and then sell to investors. For years, those loans could not exceed $417,000 for single-family homes.

There are the loans larger than that, or jumbos. It used to be those were the higher-interest loans that many borrowers in pricey areas had to use to finance their homes.

Now there's a middle tier that falls between the $417,000-and-under loans and the jumbo ones.

"It's kind of like purgatory," said Gibran Nicholas of CMPS Institute, which trains mortgage bankers and brokers. "It's not heaven, and it's not hell. It's somewhere in between as far as rates go."

This structure was created earlier this year when the credit crisis deepened and nervous investors had stopped buying loans that were not backed by Fannie Mae or Freddie Mac. Back then, the two companies were federally chartered and investors treated their loans as if they were guaranteed by the federal government, making them a safer bet. (Since then, the government has seized control of both enterprises and made that guarantee official.)

When investors stopped buying jumbos, some lenders stopped offering them. Others raised the jumbo rates. The result: Jumbo rates spiked, meaning people who needed larger loans faced sharply higher costs.

Enter the federal government.

To bring rates down, the government earlier this year temporarily raised the limit for loans that Fannie Mae and Freddie Mac can buy to $729,750 in some of the nation's priciest housing markets.

In those markets, that created that middle tier (generally called "jumbo conforming"), because Fannie and Freddie can now buy loans that fall between the old $417,000 limit and the new $729,750 cap.

That new cap expires Dec. 31.

At the start of next year, a lower cap -- $625,500 -- should take effect. Of course, all of this could change in a flash as the government tries out new ways to untangle the economic crisis.