“Jumbo loans” are loans above Fannie Mae and Freddie Mac loan limits, which in the state of Alabama is $417,000. In 2008, when the financial markets first felt the heat from the mortgage meltdown, many mortgage companies either went out of business or dropped their non conforming (any loan program that wasn’t marketable to Fannie, Freddie, or HUD) loan products off of their menu. When this happened, Jumbo loans basically became the baby that was thrown out with the bath water. Despite the fact that many of these loans were very good quality loans, there was very little, if any, demand for Jumbo loans in the secondary markets. If lenders cannot find buyers for loans in the secondary markets, then the loans they cannot sell simply sit on their books, all the while tying up the lenders money in one loan and prohibiting the lenders from loaning any new money on new loans.
Because so many lenders were literally stuck with these Jumbo loans on their books, they simply quit offering them or priced the interest rates so high that either no one wanted a Jumbo loan or the lender was guaranteed to make significant profits from the higher rates while holding the loan in their portfolio indefinitely. This is one of the main reasons that higher end homes in this country have deflated in price so much over the past few years. With no lenders offering a low rate Jumbo loan or just not offering Jumbo loans at all, the market of buyers for these homes dried up due to the lack of available mortgage funds.
As with any correction, the players in the markets (in this case the mortgage lenders) were quick to overreact by pulling out of or tightening up on the Jumbo loan market; and slowly, over time, some lenders have quietly eased back into Jumbo loans. Although most lenders are only loaning up to 80% of the sales price (or appraised value on refinances), I am aware of one lender who is financing up to 90% of the sales price or appraised value for loans up to $500,000 with no Private Mortgage Insurance – which in and of itself amounts to significant payment savings to borrowers.
With lenders easing back into the Jumbo loan market, one would think that it is only a matter of time before that segment of the real estate market will begin to stabilize and grow once again. This leads me to believe that the Jumbo loan market is not dead; and, in fact, it may be coming off of life support altogether very soon.