Jumbo Mortgage Market Is Beginning To Thaw

The meltdown sent interest rates soaring and availability shrinking, but rates are declining and lenders are more willing to make loans that top the limits for Freddie Mac, Fannie Mae and the FHA.

Phil Kelly had 18 more months to go before the fixed rate on his $2.5 Million mortgage became adjustable.

But when Kelly, a former computer executive living in Rancho Santa Fe, learned he could knock his interest rate down by a full percentage point by refinancing, he went for it.

“It’s always tough to pick the exact bottom or top of anything,” Kelly said. “But I think this rate is about as low as you’re going to get.

Rates on jumbo mortgages – loans of more than $729,750 in counties with the highest-cost housing – shot up during the financial crisis as lenders and loan investors shunned anything tainted with even a whiff of higher risk. Rates on big mortgages were especially high relative to those on smaller loans.

But in a boon for borrowers in California’s expensive housing markets, the jumbo-loan market us starting to return to normal.

Two weeks ago, the average interest rate on 30-year fixed-rate jumbos dropped to 5.79%, a nearly five-year low, according to rate tracker Informa Research Services of Calabassas. It edged up to 5.88% on Tuesday, still very attractive by historical standards. The average is down from well above 7% in late 2008.

Rates are even lower on so-called hybrid adjustable mortgages, on which the rate is fixed for, say, five years and then adjusts annually. Kelly’s new loan is a five-year hybrid adjustable identical to his old one, except that he’s paying about 5%, down from 6%.

Banks are also relaxing slightly some of their requirements for jumbo loans. That’s an encouraging sign because the market for jumbos, in contrast with the rest of the mortgage business, isn’t being propped up by Uncle Sam.

The lower rates and somewhat easier terms reflect newfound confidence among banks in the housing market. That’s because, by definition, jumbos are too big to be bought by Freddie Mac and Fannie Mae or to be insured by the Federal Housing Administration. Plus, the private market for mortgage-backed bonds dried up when the meltdown hit. So lenders making jumbo loans these days must be willing to take the risk of keeping them in their portfolios.

The maximum amounts for Freddie Mac and Fannie Mae “conforming” mortgages, and for FHA mortgages, are set by Congress. The cutoff for single-family homes was $417,000 from 2006 to 2008, when lawmakers increased it temporarily to $729,750 in certain high cost areas, including Los Angles, Orange and Ventura counties. Conforming loans top out at $500,000 in Riverside and San Bernadino counties and $697,500 in San Diego.

The increased upper limits, which have been extended until the end of this year, have created a three-tier system in expensive areas, mortgage professionals say: loans of up to $417,000, which are the easiest to obtain and carry the lowest rates, “conforming jumbos” from $417,000 to $729,750, which are somewhat harder to get and have slightly higher rates; and true jumbos, with the toughest standards and highest rates.