The endangered jumbo loan appears to be making a comeback, with rates shrinking to near historic lows as banks get back into the market of lending to buyers of higher-priced houses.
"The price of the money has been getting steadily better," said Keith Gumbinger, senior vice president of financial publisher HSH Associates. The interest rates for non-agency jumbo loans, which don't conform to Fannie Mae, Freddie Mac, or Federal Housing Administration lending standards, were down to 5.73% recently, not much higher than the 5.55% low in June 2003, he said.
"We are not exactly at rock bottom," Gumbinger said. "But it would be hard to argue that sub-6% loans are high by any means."
Up until recently, non-agency jumbo loans were barely available because there really wasn't much of a secondary market for banks to sell the loans off to. But now some banks are getting back into the business of making the loans and holding them in their portfolios simply because there is a paucity of other acceptable investments, according to Gumbinger.
"The portfolio lending model had sat idle for a number of years," Gumbinger said. "A lot of rust had to be scraped off the model. But it is back up and running pretty well right now, which is good."
Banks are beginning to post profits again. "If you have profits, then you are going to be interested in doing more lending," he added.
Because of the current economic situation, banks aren't likely to be excited about making more consumer loans in the form of credit cards or auto loans. Likewise, commercial lending isn't such a safe bet either.
Lending money for jumbo loans has become more attractive to banks, so much so that the interest rates have declined for the products.
Because the banks are keeping the loans in their own portfolios they can set the rules, specifying high credit scores and higher down payments to lower a loan's risk.
That's the downside for consumers because, while interest rates are down, banks aren't lowering the loan requirements since they alone hold the entire risk for a loan's success or failure.
"Underwriting isn't any looser," said Gumbinger. "It's not simple to get a jumbo loan by any means."
There are also signs that there might be a secondary market budding for jumbo loans again. Recently Redwood Trust sold one of the first new issues of mortgage-backed securities since the real estate bubble burst. It sold a $238 million securitization backed by pools of prime jumbo mortgage loans. Demand was reportedly strong.
Gumbinger said the mortgages in the pools were reportedly given to extremely low-risk borrowers with credit scores well above 760 and who had as much as 60% of the value down.
That deal didn't escape the notice of Don Salmon, president of Toll Brothers' TBI Mortgage.
"That's really good news," said Salmon. "That's our buyer."
Salmon said a 30-year jumbo loan could be had this week for 5.75%, "which is terrific."
"We also have the availability in some states in the Northeast to get a 5.5% rate locked in for a year for buyers willing to pay a couple of points," he said. That's helpful because the build-out of Toll's larger houses can take longer than that of production builders of smaller homes.
Salmon said Toll, whose clients buy high-end houses in high-end markets, has been able find sources of jumbo loans for its borrowers throughout the downturn despite the scarcity of sources for the product.
"We were pretty lucky," Salmon said. "But it's been a lot of work."