By Kenneth R. Harney
Saturday, March 21, 2009
New money is about to flow into a part of the real estate market that has been squeezed hard by the credit crisis: mortgages too large to be purchased or backed by Fannie Mae, Freddie Mac or the Federal Housing Administration.
Higher-cost areas throughout the country traditionally have depended on the ready availability of "jumbo" mortgages to finance houses. Such neighborhoods are heavily concentrated in California, portions of Florida and the Northeast, including the Washington region. With the collapse last year of the private mortgage bond market on Wall Street, home buyers, builders and refinancers who relied on jumbo financing were left with few sources -- except with punitively high interest rates and huge down payments.
Now, though, major banks are heading into the jumbo segment, originating big loans at affordable rates -- not for Wall Street bond traders, but for their own investment portfolios.
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 loans will be available through the bank's retail network and also through its Countrywide Home Loans subsidiary. After April 27, Countrywide will be rebranded -- shedding the name it has had since 1969 -- and morph into Bank of America Home Loans. Bank of America acquired Countrywide, once one of the biggest subprime lenders, last year.
Barbara Desoer, the bank's head of consumer real estate operations, said there's "a real need" for capital in the jumbo arena, where interest rates last fall sometimes exceeded conventional loan rates by three to five percentage points -- if financing was available at all.
Traditionally, jumbo loans have been defined as any home mortgage whose principal amount exceeded Fannie Mae and Freddie Mac's statutory high-cost market purchase limit, which has bounced around lately. At the beginning of this year, the ceiling was $625,500, up from $417,000 at the beginning of 2008. For a while last year, Congress raised the upper limit in high-cost areas for Fannie, Freddie and the FHA to $729,750. In the economic stimulus legislation passed by Congress last month, that maximum was extended through Dec. 31 of this year.
Although it will almost immediately become the biggest player in the jumbo loan segment, Bank of America will not be alone. With little fanfare, other financial institutions have become more active. For example, 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 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 and up in 50 states for a handful of large commercial banks, which then put them in their investment portfolios.
Victoria Johnson, chief executive 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 abroad. For a loan of $1.5 million to $2.5 million, MortgageBase wants 40 percent down and liquid reserves of 50 percent of the loan amount to qualify for a 4.875 note rate on a 5/1 hybrid.
Johnson of Luxury Loans said she welcomes Bank of America's entry into the mass-market jumbo arena. "We need them because there's been a really serious lack of liquidity at this end of the market," she said, and that has hurt home prices throughout California as well as parts of the East Coast.
"The more competition," she said, "the better."
Bottom line: If you have been postponing a purchase, sale or refinancing because the loan amount you need is too big for Fannie, Freddie or FHA, check out the new, non-Wall Street sources of jumbos.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.