Forced to near extinction by shaky credit markets, the jumbo mortgage loan is making a comeback, which is good news for builders who sell high-end homes or build in expensive markets.

Interest rates have improved, and more financial institutions are starting to lend money for home mortgages with price tags too high to be bought by Fannie Mae or Freddie Mac, said industry watchers.

Standard Pacific Homes, with its large California presence, has noticed an improvement in the past few weeks. “Certainly the migration down in rates has helped,” said Todd Palmaer, president of Standard Pacific’s California region. “But what we’ve also seen in the past few weeks is more product and more sources of product coming to the market.”

Plus, lenders are offering slightly better terms. “They are being a little bit more liberal in loan-to-value,” said Palmaer, “probably moving more in the 70% to 75% (of financing) with some sources willing to go up to 85%.” Consequently, Standard Pacific has seen a slight up tick in demand in the past 30 days to 45 days, Palmaer said. “Overall, we are cautiously optimistic.”

Donald Salmon, president and CEO of TBI Mortgage, Toll Brothers’ lending arm, has also seen some more liquidity in the market. Though Salmon says Toll, even with its high-end products, has not been heavily impacted by the jumbo shortage.

The company was able to find local banks that would make the loans at reasonable rates.

“Our buyers really didn’t feel it,” said Salmon. “I don’t think it cost us any sales.” Though he applauds any kind of improvement in the credit market, “I think anything that makes it easier and or less expensive helps.”

Bank of America recently announced it was jumping back in the jumbo business. ING has also been offering the loans above the $417,000 conforming limit in most markets and $729,750 in high-cost areas.

Keith Gumbinger, of HSH Associates, a mortgage research firm and publisher, said banks are more willing to lend money for jumbo loans because they have more cash to lend, and there aren’t many other profitable places to put it. Banks have more cash on hand because of TARP money and because the low interest rates have led many home owners to refinance their homes, paying off their old loans in the process.

“When cash comes back in the refinancing process, they put some to their bottom lines and put some in other profitable lending endeavors,” said Gumbinger. But it’s difficult to find profitable lending endeavors these days. “It’s certainly not commercial loans, not credit cards, not auto loans, so where do you go?” Gumbinger postulated.

Jumbo mortgage loans, which the banks will hold on their own books because there is no secondary, market for them, look good, comparatively. Plus the default rate has been historically low.

“You get to control what you are lending,” he said. “You can write your loans to your own risk profile and at 6.35%, that’s a huge premium. No other investment is offering 5% or 6% over cost of funds.”

The Mortgage Bankers Association doesn’t have a lot of data comparing the originations of jumbo loans versus conforming, said Michael Fratantoni, the organization’s vice president of research.

“But we do have an environment which would be supportive of lenders offering jumbo mortgages,” says Fratantoni. There has been a strong growth in Federal Reserve deposits recently and the Federal Reserve isn’t offering very much return on those deposits, which encourages lenders to seek other better-paying places to put their increasing cash.

Still, while rates on jumbo loans have declined significantly from last fall, roughly 160 basis points from 7.90% at Halloween, they still are higher historically compared to conforming home loans. Last year there was roughly a three percentage-point difference and now it’s down to closer to a two-point spread. Traditionally, the spread was between .25 to .50 percentage points, Fratantoni said.

Gumbinger points out that conforming home loan interest rates are probably two points lower now than they would be naturally if the Federal Reserve weren’t keeping them artificially low. If conforming home loans were closer to a more natural 6% rate, jumbo loan pricing would fit within that traditional spread, he said.

“That would be where the natural market would be,” he said.