In the second quarter of 2010, jumbo mortgage lenders originated $18 billion in jumbo loans. Mortgage loan giants, such as J.P. Morgan Chase and Wells Fargo, contributed the most to this improvement in jumbo mortgage lending. J.P. Morgan Chase increased its jumbo mortgage lending volume by nearly 150 percent in comparison to last year. Wells Fargo increased its jumbo mortgage loan origination by nearly 50 percent compared to last year. Another major player, PHH Corp., increased its jumbo mortgages by nearly 65 percent. As of this writing, the 30-year fixed jumbo mortgage rate is 5.125 percent, the 15-year fixed jumbo mortgage rate is 4.625 percent, and the 5/1 adjustable jumbo rate mortgage is 3.875 percent.

Later this month, First Republic, a spin-off from Bank of American Corp. specializing in jumbo mortgage loans, is going public. The bank has experienced an increase in jumbo mortgage loans by an annualized 24 percent. First Republic expects to raise $280.5 million from its initial public offering (IPO.) Of that amount, $92.4 million will go to the bank and the remainder will contribute to other expenses, fees, and debtors, such as private-equity firms General Atlantic and Colony Capital. All in all, after only six months since Bank of America sold First Republic to its current owners for only $1.86 billion, First Republic will be valued at $3.27 billion.

Considering the current economic landscape of increasing home foreclosures and decreasing employment opportunities, jumbo mortgage loans are seemingly a risky investment for mortgage lenders. In the past, this assumption was accurate as a result of the sheer size of these hefty home loans. Jumbo mortgage loans are considered mortgages over $417,000 for average markets in the continental U.S.; $729,750 in high cost areas, such as Los Angeles, New York City, and Chicago; and $938,250 in Alaska, Guam, Hawaii, and U.S. Virgin Islands. However, that is not the case today. Jumbo mortgages have the lowest default rates and their borrowers have a near pristine credit history.

As Thomas A. Kelly, spokesman for J.P. Morgan Chase, astutely remarks that although J.P. Morgan Chase is more than capable of offering jumbo mortgage loans to prospective mortgage customers, he says, “we are still using very disciplined underwriting and we want to make sure that [jumbo loan borrowers] have an ability to repay the loan.” Underwriting requirements include, but are not limited to: two or more months’ worth of bank statements and pay stubs, financial statements, such as a profit and loss statement for sole proprietorships, and at least two years’ of tax returns.

Despite seemingly rigid requirements, jumbo mortgage loan borrowers are proving that they are willing to endure the pains, as is evidenced by the increased market share of jumbo loans and the forecasted profitability of jumbo mortgage lenders. On an even more encouraging note, due to fraud allegations from Fannie Mae and Freddie Mac, many mortgage loan lenders are offering jumbo mortgage products as a mere means to stay in business. The process may be daunting, but the potential to own your dream home is a more than adequate incentive to persevere to the end.

Jumbo mortgage lenders originated $18 billion in the second quarter of 2010. Mortgage loan giants contributed to the majority of the boost. J.P. Morgan Chase increased its jumbo mortgage lending volume by nearly 150 percent compared to last year. Wells Fargo increased its jumbo mortgage loan origination by nearly 50 percent. Another major player, PHH Corp., increased its jumbo mortgages by nearly 65 percent. As of this writing, the 30-year fixed jumbo mortgage rate is 4.75 percent and 4.375 percent for a 15-year fixed jumbo loan.

Smaller local banks typically have more flexible options to offer prospective jumbo loan borrowers, such as higher loan-to-value ratios and adjustable mortgage rate programs. Also, due to their relatively lower volume, mortgage processing times are cut in half with local lenders. Whereas big mortgage lenders may take between two to fourth months to fully process a jumbo loan, smaller regional banks can close a deal within 60 days.

A pressing question is why banks are so interested in the jumbo loan market. Jumbo mortgage loans are considered mortgages over $417,000 for average markets in the continental U.S.; $729,750 in high cost areas, such as Los Angeles, New York City, and Chicago; and $938,250 in Alaska, Guam, Hawaii, and U.S. Virgin Islands. Due to the sheer enormity of these loans, they are historically known to be much riskier than conforming mortgage loans. In the current economic landscape, however, jumbo mortgage loans have a lower default rate, and, therefore, are substantially less risky than previous years.

Part of the reason jumbo loans are less risky nowadays is that banks are tightening the reins on qualification standards. Spokesman for J.P. Morgan Chase, Thomas A. Kelly, comments that although J.P. Morgan Chase has the capacity to offer jumbo mortgages to customers, he says, “we are still using very disciplined underwriting and we want to make sure that [borrowers] have an ability to repay the loan.” Additionally, mortgage lenders may require two or more months of paystubs, financial statements, and a couple years worth of tax returns. Some jumbo lenders may also verbally question borrowers regarding their paperwork.

Jumbo mortgage borrowers are also seeking these loans. As of this writing, conforming jumbo mortgage rates are steady at 4.875 percent for a 30 year fixed rate loan with 0.7 to 1.0 point origination and 4.375 percent for a 15-year fixed jumbo loan with similar origination. With such favorable rates, the increased interest in jumbo mortgage loans is expected. Low jumbo mortgage rates have also spurred interest in jumbo mortgage refinances. Jumbo loan refinances allows current homeowners to alter the risk of their current jumbo loan by refinancing out of an adjustable rate jumbo mortgage and into a more stable fixed rate jumbo mortgage.

The Federal Housing Administration offers seniors a reverse mortgage program, the Home Equity Conversion Mortgage, which allows seniors to access home equity. Although, FHA does not stipulate a maximum amount on the appraisal of the home, it does limit the amount borrowed. Seniors are permitted to borrow a maximum of $625,500. Seniors with a jumbo mortgage are very limited with the standard FHA program. Generation Mortgage is providing seniors with a jumbo mortgage more options. Under its new reverse mortgage loan program, seniors may borrower up to $6 million.

Reverse mortgage loans are very different from traditional mortgage loans. It is essentially a line of credit that allows borrowers to convert home equity into cash. It is limited only to seniors over the age of 62. They may receive funds via lump sum, equity line of credit, or in monthly installments. Moreover, repayment of the reverse mortgage occurs in full when the homeowner sells the home, passes away, or moves. In addition to the reverse mortgage, any interest accrued and other fees are due in full to the lender.

The Generation Plus Loan is available to seniors over the age of 62. Unlike the FHA Home Equity Conversion Mortgage, the Generation Plus Loan does not require an upfront insurance premium. According to Joe Morris, CEO of Generation Mortgage, “a typical 75-year old borrower whose home is valued at $750,000 will gain approximately $25,000 in additional funds compared to other jumbo loan products.”

Generation Mortgage charges a higher mortgage rate on its jumbo reverse mortgages. As of this writing, the mortgage rate is 7.78 percent, depending on the program appropriate for the needs of the borrower. The Generation Plus Loan allows borrowers to convert their home equity into cash and receive funds in several ways: lump sum, equity line of credit, or monthly payments. Moreover, potential reverse mortgage borrowers must have a credit score of 700 or higher.

The credit score is crucial to qualify for a reverse jumbo mortgage. Since, an insurance premium is not charged, mortgage lenders require some assurance that borrowers will act responsibly. Borrowers are required to maintain the property in good condition, conforming to the appearance of neighborhood comparables. Mortgage lenders also want guarantee that borrowers can continue to afford the taxes and insurance on their property.

Thus far, the program has successfully filled a neglected market segment. According to Jeff Lewis, Chairman of Generation Mortgage, the Generation Plus Loan serves aging baby boomers who are still childrearing and aides older children in supporting their aging parents. Many older children are responsible for the support of their aging parents as medical issues arise and additional care is required. Lewis also noted that seniors desire to reside in their homes as long as possible. He comments, “The Generation Plus simply gives more of them an opportunity to do so.”

There are three major modifications to the underwriting guidelines for a FHA- insured mortgage loan. First, upfront mortgage insurance premiums decreased from 2.25 percent to 1.0 percent. Although this seems like a beneficial change for prospective borrowers, FHA has proceeded to increase the annual insurance premiums. Previously, annual mortgage insurance on an FHA-insured loan was 0.55 percent, which is paid out in monthly increments, usually rolled into a borrower’s monthly mortgage payment. As of October 4th, the new annual mortgage insurance is 1.55 percent. The increase in annual insurance premium will increase the overall cost of the FHA- insured mortgage over the term of the loan. Note that this change alone, according to FHA Commissioner, David Stevens, will increase FHA capital reserves $3.6 billion annually.

The second change to the underwriting guidelines for an FHA-insured mortgage is an increase in the annual mortgage insurance premium is correlated to the loan-to-value ratio of a prospective FHA borrower. For example, if a prospective borrower has a loan-to-value ratio of up to 95 percent, the annual insurance premium would increase to 0.85 percent, which is 0.30 percent higher than average. If the loan-to-value ratio exceeds 95 percent, the annual insurance premium would increase to 0.90 percent.

Some lenders believe the restrictions on loan-to-value ratios are futile. If the Federal Housing Administration hopes to limit the number of loans it insures, which is nearly 30 percent of all mortgages, then high debt-to-income ratios are counterproductive. A home loan borrower may obtain a new FHA-insured mortgage with debt as much as 55 percent of his or her monthly income.

The third alteration implemented by the Federal Housing Administration is an increase in the minimum credit score requirement. In order to qualify for an 3.5 percent down payment, a prospective borrower must have a minimum credit score of 580. If a prospective FHA borrower has a credit score between 500 and 579, he or she must apply 10 percent of the loan amount as a down payment. Any prospective FHA borrowers with a credit score less than 500 will not qualify for an FHA-insured loan under the new qualification guidelines.

According to FHA Commissioner, David Stevens, tightening FHA qualification standards are crucial to the preservation of FHA- insured home mortgage loans. In August, Stevens reported that FHA capital reserved dipped below Congress mandated requirements. In September 2008, capital reserves were strong at $19.3 billion. However, in June 2010, capital reserves decreased to only $3.5 billion. The primary explanation for the stark decrease in less than two years is the spike in FHA-insured mortgage defaults and foreclosures. As FHA borrowers were losing their homes, the Federal Housing Administration was depleting its capital reserves to pay off lenders.

On a positive note, as an FHA-insured mortgage loan is becoming more difficult to qualify for, jumbo loans are becoming that much easier. Many leading mortgage lenders, such as J.P. Morgan Chase and Bank of America, are loosening the reins on jumbo mortgages, which may increase the demand for luxury housing as well.

As of this writing, jumbo mortgage rates are 4.875 percent for a 30-year fixed rate jumbo loan. Non-conforming jumbo mortgage loans are loans above $417,000 in average markets; more than $729,750 in high cost areas, such as Los Angeles, New York City, and Chicago; and more than $938,250 in Alaska, Guam, Hawaii, and U.S. Virgin Islands. These limits are established by the U.S. Department of Housing and Development (HUD) and implemented by the Federal Housing Administration (FHA,) Fannie Mae, and Freddie Mac. Jumbo loans that do not exceed the established limits are considered conforming jumbo mortgage loans and qualify for FHA financing.

Conforming jumbo loans may take advantage of lower jumbo mortgage rates and FHA insurance. As of this writing, 30-year fixed FHA mortgage rates are 3.875 percent. It is important to note, however, that FHA has strict qualification guidelines. Some of the requirements include: pay an annual mortgage insurance premium of 1.5 percent of the loan amount; have a minimum credit score of 620; principal, interest, and insurance reserves of two months; and no 30-day late payments are permitted. Borrowers who are able to meet these guidelines may obtain an FHA-insured jumbo loan, which decreases riskiness to the lender.

Nevertheless, lenders also make their own rules regarding jumbo home loans. A spokeswoman for J.P. Morgan Chase commented that “the bank follows a disciplined process to verify information.” In addition to two or more months of paystubs, financial statements, and a couple years worth of tax returns, lenders may verbally question borrowers regarding their paperwork. These precautions may verge on paranoia, however, with the government blaming mortgage lenders for originating faulty loans, banks are running out of options.

Fannie Mae and Freddie Mac have accumulated $150 billion in taxpayer bailouts since 2008, which is likely only the beginning as they expect to request more funds from the U.S. Treasury. The two GSEs have also incurred $5 trillion mortgage defaults. Therefore, they are scrutinizing every facet of the mortgage loan process that would disqualify the loan and transfer liability back to the banks. Lenders are then required to buy back bad loans, which could amount to billions of dollars. Banks may then hire legal counsel to contest the allegations made by Fannie and Freddie. Estimated costs to the banking industry: $44 billion.

With the heightened state of alarm, it is no wonder mortgage lenders are putting borrowers through the wringer. A borrower may have an 800 credit score, a debt-to-income ratio of 40 percent, 20 percent to put as down payment on the jumbo loan, and still be scrutinized for something as silly as a slight tear in the left-hand corner of a paystub. The old adage applies in this market: Good things come to those who wait.

Prior to the mortgage market bust in 2007, jumbo mortgages dominated almost a quarter of the market. As market news went from bad to worse with waves of mortgage defaults, market share for jumbo loans shrank to almost nil. To revive the market, President George W. Bush signed into law an increase in the conforming jumbo loan limit. Today, jumbo loans are considered loans over $417,000 for average markets in the continental U.S.; $729,750 in high cost areas, such as Los Angeles, New York City, and Chicago; and $938,250 in Alaska, Guam, Hawaii, and U.S. Virgin Islands. According to recent data released by CoreLogic, a mortgage-data company, jumbo loans are on an upswing and currently hold a 6 percent share in the overall mortgage market, which is a 100 percent increase from January to May.

The jumbo conforming loan limit was set to expire December 30, 2010. However, last month the Administration approved an extension of the higher conforming jumbo loan limit until September 20, 2011. This means that the Federal Housing Administration can continue to insure the higher cost mortgages which meet underwriting guidelines established Fannie Mae and Freddie Mac, which is fantastic news. California Democrat and member of the House Financial Services Committee, Representative, Brad Sherman, said that if the government lowers the jumbo limit then housing prices will drop dramatically and, “[it would be] impossible to finance homes in most parts of Los Angeles and certain other major cities.”

Los Angeles has a very strong reliance on the higher loan limits. Borrowers, for example, may purchase a condominium or house for $750,000 with only 3.5 percent down. Private lenders typically require at least 20 percent down. Moreover, their loans are guaranteed by the FHA, which also incentivizes lenders. Last year, California accounted for one in eight FHA-insured loans.

Mortgage institutions are also more open to financing jumbo loans. Wells Fargo, for example, nearly doubled its jumbo loan originations over last year to $3.7 billion in the second quarter. J.P. Morgan Chase reports a similar positive trend in jumbo loan activity. It is up 16 percent for the second quarter and doesn’t intend to stop there. Although these loans are larger than average mortgages, jumbo loans are less risky, with lower default rates, because banks require higher quality borrowers. Plus, jumbo mortgage rates contribute to the affordability of these loans. As of this writing, conforming jumbo mortgage rates are steady at 3.875 percent for a 30 year fixed rate loan with 0.7 to 1.0 point origination.

Private mortgage lenders offer borrowers even more options for their luxury housing needs. Private institutions are not limited by the conforming loan limits. Interest rates on these non-conforming jumbo loans are about 1 percent higher than the conforming jumbo loans insured by the FHA. According to the prominent online real estate brokerage firm, Redfin Corp., the luxury housing market is the only category that has boosted sales of the seven major markets. The pursuit of jumbo mortgage borrowers by big banks, such as J.P. Morgan Chase and Wells Fargo, and the super low mortgage rates has contributed to renewed interest in expensive housing. Spokesman for the National Association of Realtors, Walter Maloney, attributes the recent affordability and the increased availability of jumbo mortgage loans to the boost in sales.

In August, David Stevens, the Federal Housing Administration, had reported that FHA reserves dipped below the amount mandated by Congress. Due to the increase in mortgage defaults and foreclosures, capital reserves went from $19.3 billion in September 2008 to $3.5 billion in June 2010. Stevens also said that the FHA held an unhealthy share of the mortgage market by insuring over 30 percent of the mortgage loans across the nation, which is nearly a 20 percent increase from the amount insured in 2006. If the FHA is to continue to offer borrowers affordable housing options by insuring mortgage loans, then the Department of Housing and Urban Development (HUD), which oversees FHA, needs to recoup losses and increase capital reserves. Changes to the program were crucial.

Last Monday, October 4th, the changes went into effect. The FHA increased the credit score requirement. Borrowers with a score less than 500 cannot qualify for an FHA-insured loan any more. Borrowers with a score between 500 and 579 are required to make a down payment of at least 10 percent. Borrowers with a score above 580, however, qualify for a loan with only 3.5 percent down. The FHA dropped the upfront mortgage insurance premium to 1 percent of the total loan amount, and nearly tripled the annual mortgage premium from 0.55 percent to 1.50 percent. Although, this will increase the cost of the mortgage over the life of the loan, according to Stevens, the new annual mortgage insurance premium alone is expected to increase FHA reserves $3.6 billion annually.

Despite stricter qualification standards, according to some experts, they will not cause a dramatic decrease in FHA applications. Most mortgage lenders had imposed higher credit score requirements on FHA borrowers. Some, in fact, required a score of 640 or higher to qualify for an FHA loan. Lew Sichelman, columnist for United Features Syndicate, wrote last week that for the first few years the changes will actually be cheaper for borrowers, “…because most borrowers choose to finance the initial fee as part of the loan amount.”

The new FHA standards are having a positive effect on the jumbo mortgage market. As of this writing, the jumbo mortgage rate is 4.875 percent for a 30-year fixed jumbo mortgage loan. From big banks, such as Citibank and Wells Fargo, to smaller lending institutions, lenders are requiring lower down payments and considering softer credit histories with credit scores typically 650 and above. Some lenders offer jumbo mortgage loans for as low as 10 percent down, 65 percent loan to value ratio, and $10 million mortgages. Jumbo loans pose less of a risk for mortgage lenders and default rates are relatively low in comparison to other loans.

FHA Loans have been the easiest to qualify for and cheapest to obtain in recent years. However, as the FHA tightens lending standards and increases mortgage insurance premiums, FHA borrowers may remain active in the market. Plus, the new standards create an opportunity for jumbo loan lenders and borrowers.

More jumbo mortgages

Prior to 2007, jumbo mortgages – any loan over $417,000 in average markets – made up 22% of the mortgage market. Today, they’re about a 6% sliver. But private lenders are getting back into the jumbo market. These supersized loans are up 3% from January to May, according to the most recent data available from CoreLogic, a mortgage-data company. Wells Fargo (WFC: 25.57*, -0.08, -0.31%) almost doubled its jumbo lending to $3.7 billion in the second quarter (compared to a year ago), and Chase (JPM: 40.08*, +0.35, +0.88%) is up 16% for the same period, with plans to keep growing.

The sheer size of these loans suggests more risk for the lender. (If the borrower defaults, the lender could take a bigger hit.) But for the high-quality borrower, it’s risk the banks now seem willing to take, says Keith Gumbinger, a vice president at HSH Associates, a mortgage-data tracking firm. If foreclosures are low, private lenders are likely to extend jumbo mortgages to a broader group of borrowers in the next year or so. Meanwhile, smaller local lenders have also gotten into the market, Cummings says.

For better borrowers, this means more options. A Fannie- or Freddie-backed mortgage can go up to $729,750, but private lenders can go higher when they keep the loan on their books – an advantage for someone house-hunting in expensive cities like New York, Boston or Washington (and a potential boon for those housing markets overall). Interest rates on jumbo mortgages backed by private lenders are about 1% higher than those backed by the government.

Read more: 3 Signs the Mortgage Market Has Hit Bottom – Personal Finance – Real Estate – SmartMoney.com http://www.smartmoney.com/personal-finance/real-estate/3-signs-the-mortgage-market-has-hit-bottom/#ixzz12A0gABfT

Loans insured by the Federal Housing Administration have held a majority of the market share, as one in three loans are FHA loans. Total mortgage applications increased 9.3 percent last week

Sometimes good news is misleading.

From about 2003 to the middle of 2007, lending standards relaxed on jumbo loans as lenders competed for customers. It became typical for lenders to skip over verifying the income borrower’s claimed on their loan applications. It was also typical for lenders to give jumbo loans to homeowners with only 5 percent down payments. But, beginning in August 2007, the credit squeeze scared lenders away from the jumbo loan market.

Lenders are once again offering jumbo loans, however the requirements needed to qualify are much more stringent. Banks are also returning to the jumbo loan market as the stringent credit standards have made the default risk on jumbo loans low.

For those who do qualify, jumbo loan rates are currently appealing. The spread between jumbo and conforming loans has narrowed, and since the average rates on 30 year fixed-rate loans have fallen, the rates on jumbo loans have fallen as well.

So, if you are in the market for a jumbo loan, here are the new rules:

• A down payment, or, if refinancing, equity, of (usually):
• At least 20% down for jumbos up to $1 million
• At least 30% down up to $2 million
• More for loans over $2 million
• An excellent credit score (at least 720 but could be more as some banks report that their average jumbo customer has a credit score in the 760s)
• Income documentation and verification. Borrowers are now required to provide financial records verifying that they earn what they say they earn (some borrowers have been asked to provide two years of their income history).
• Expect to obtain an adjustable-rate loan; fixed-rate jumbos are relatively rare.
• DTI (Debt-to-Income) of less than 38 percent. That means a borrower’s monthly mortgage payment must be less than 38 percent of their income before taxes. The ability to afford to make monthly payments is critical in the jumbo loan market.
Be prepared to shop around. Depending on what part of the country you are in, lenders can have different jumbo loan lending guidelines. Guidelines may also vary depending on the type of dwelling (condo vs. house), whether it is a primary home or investment property (some lenders will only approve jumbo loans for primary residences; others will grant jumbo loans for vacation homes or investment properties).

Jumbo loans are not commodities. Today, most jumbo loans come from the big banks that are keeping loans on their books instead of selling them. Falling property values are still a concern, but with jumbo loans requiring a lower loan-to-value ratio, even if housing prices dropped sharply, the risk to the bank is low. Since interest rates on deposits are currently low, the bank makes money by charging higher interest rates on mortgages than they pay on their customers’ deposits, thereby profiting on jumbo mortgages, even when the mortgage is offered at a low rate. However, keep in mind that rates paid on deposits will someday rise again. Banks are promoting jumbo ARMs whose rates will rise when rates paid on deposits go up. The most popular jumbos are 5/1 ARMs, which have an introductory rate that lasts five years; then adjust annually thereafter.

Jumbo mortgages are those loans that are too large for government assistance through Fannie Mae, Freddie Mac and the FHA which is available for mortgages that don’t exceed $417,000 and $729,750 in more expensive areas of the country. After the financial crisis hit, the jumbo mortgage market basically froze and came to a halt. With the absence of a secondary market and housing prices continuing to drop, lenders had to keep these existing jumbo mortgages on their balance sheets and became unwilling to add any additional risky, jumbo loans to their portfolio which left high end buyers locked out of the market. It literally crippled the jumbo mortgage market for high end home purchases and refinances.

As banks have begun to recover and have more capital on hand, they are now more willing to return to the jumbo mortgage market, although at a cautious pace since the secondary market has not yet returned. As the jumbo mortgage market tends to be more varied, so do the interest rates and terms vary widely. All of this is great news for upscale home shoppers, those who want to refinance and those who want to upgrade to larger homes.

Although the banks are beginning to lend and jumbo mortgage rates are at record lows, lenders are still being very cautious and using tight standards for qualifying. Those applying will need to fully document income and assets for the past several years. Although required credit scores will vary, the average score needs to be at least 720. As far as debt ratios are concerned, monthly mortgage payments must require no more than 36% to 38% of pretax income. Debt payments, including auto loans and credit card payments, cannot take up more than 41% of pretax income. For purchases, the down payment depends on the amount of the loan with some as low as 20% and some as high as 40% down payment.

For anyone who qualifies, the current jumbo mortgage rates are very competitive. Borrowers who are shopping for an adjustable rate can choose from the 5/1 ARM at 3.625%, 7/1 ARM at 4.50% and the 10/1 ARM at 4.90%. For a fixed rate jumbo mortgage, the 15 year fixed is 4.50% and the 30 year fixed is 5.125%. Since these rates vary from lender to lender, borrowers need to shop around. While the short term borrower may opt for the adjustable rate mortgage, the long term borrower might find the fixed rate more attractive since rates are so low and have no where to go but up. The rate spread between the conforming mortgage and the jumbo mortgage has narrowed down to less than a percentage point.

With no secondary market, the jumbo market has not yet completely melted. With jumbo mortgage rates at record lows and the jumbo market thawing, it is wise to remember that it is limited to the amount that the banks are willing and able to keep on their own balance sheets until the return of private outside funding.

Normalcy has returned. The jumbo loan environment has settled into a prove it, we double verify it, and we fund it environment for well qualified borrowers. The recent national statistics show about 14% loans with a principal balance of 1m+ are at least 60 days late. This is up sharply in the last six months from the 9.78% figure that we ended 2009. Hopefully these default figures will flatten out and fall as the better jumbo loans of 09-10 perform much better than the loans closed in 04-08.
Against this backdrop jumbo loans are being funded only on a portfolio basis (Wall ST jumbo loan packaging is dead) to solid clients under the philosophy that the borrower and the amount of equity in the property should have an ample margin for the known/unknown risks a borrower/lender may face down the road. With regulators, taxpayers, shareholders and all stakeholders demanding sound lending the industry has delivered. I believe this only benefits the luxury market although it pushes out the marginal borrower and may result in some property value declines as the available buyers have thinned out a bit.

Sound lending has returned and borrowers are being ‘rewarded’ for their financial strength and prudence. Remember it’s a ‘prove it’ to us world now.

First and foremost, lenders are pulling copies of your tax returns directly from Uncle Sam. The idea here is to make sure that you haven’t altered the copy of your last two years’ tax returns that you provided when you signed your loan application. Lenders want to know if you might have exaggerated how much you earned.

Lenders also are going to great lengths to verify employment and liquid assets. We are seeking confirmation in writing from your H.R. department about what you earn, your position and how long you’ve worked there.

It’s the same for your bank or brokerage accounts. Rather than being satisfied solely with the copies of the statements you provided, lenders are going directly to your financial services company to secure another set of those statements to make sure the numbers line up or that you just lost 200k betting that the latest iPhone signal problem would crush Apple’s stock price.

Lenders are no longer taking the appraiser’s word for how much the property you want to buy or refinance is worth, either. Now, we are employing automated valuation models as well as an additional appraisal from a separate vendor to be certain the value estimate is on the money. This is especially true in highly distress markets or for very unique custom homes. After all, the bank is ‘buying’ the home and the borrower is signing to pay it back over 15-30 years.

Next in the line of close scrutiny is your credit score, but not just the score pulled when you applied for the loan. Now, our industry is pulling a second score shortly before closing to make sure that you haven’t taken out a luxury car lease/loan, bought a houseful of furniture on credit or done something else that might change your ability to make your house payments.

Having passed all these double checks, a well qualified client with 20%+ equity, a 740 FICO or better, borrowing $1m on a primary residence could lock in the following jumbo loan rates in the majority of states:

Jumbo Mortgage Rates
5/1 ARM 3.625%
7/1 ARM 4.50%
10/1 ARM 4.90%
15Y Fixed 4.50%
30Y Fixed 5.125%

With a bit more equity and a higher FICO score these jumbo loan rates are even lower. I think people need to strongly consider locking in the lowest fixed jumbo mortgage rates we have ever seen. Most client’s refinancing are saving 1-2 thousand dollars a month because they are dropping their interest rates over 1%. The majority of jumbo mortgage loans funded over the last quarter were 30Y fixed. Maybe running with the herd is right once in awhile. The latest chart should really demonstrate how much money is on sale for SOLID borrowers.

And above all please get a jumbo loan that makes sense for your short and long term financial plans. As always, have a prosperous day.