In the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...

, a jumbo mortgage is a

mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

that may have high credit quality, but is in an amount above conventional

conforming loan In the United States, a conforming loan is a mortgage loan that both meets the underwriting guidelines of Fannie Mae and Freddie Mac (the ''Enterprises'' or GSE) and that does not exceed the conforming loan limit. The most well-known guideline is ...

limits.Lemke, Lins and Picard, ''Mortgage-Backed Securities'', Chapter 3 (Thomson West, 2013 ed.). This standard is set by the two

government-sponsored enterprise A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United States Congress. Their intended function is to enhance the flow of credit to targeted sectors of the economy, to make those segments of th ...

Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...

and

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.FNMA The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...

and FHLMC limits don't cover the full loan amount, the loan is referred to as a "jumbo mortgage". Traditionally, the interest rates on jumbo mortgages are higher than for conforming mortgages, however with GSE fees increasing, Jumbo loans have recently seen lower interest rates than conforming loans.

History

On February 13, 2008, President George W. Bush signed the

Housing and Economic Recovery Act of 2008 The United States Housing and Economic Recovery Act of 2008 () (commonly referred to as HERA) was designed primarily to address the subprime mortgage crisis. It authorized the Federal Housing Administration to guarantee up to $300 billion in ne ...

(), which temporarily increased the jumbo conforming limit in the United States. The limit was raised to $729,750 or 125% of the median home value within the

metropolitan statistical area In the United States, a metropolitan statistical area (MSA) is a geographical region with a relatively high population density at its core and close economic ties throughout the area. Such regions are neither legally incorporated as a city or tow ...

, whichever is the lesser. Initially due to expire in December 2008, the new limits were extended through 2010.Confirmation of Conforming Loan Limits for 2010
- Fannie Mae, November 12, 2009 Mortgage lenders did not freely adopt these new limits, making them essentially "theoretical," as mortgages above the old conforming limit of $417,000 still attracted higher interest rates. , the limit on a conforming loan in "general" areas was $417,000 for most of the US, apart from Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where the limit was $625,500. The limit in "high cost" areas was $729,750 and $938,250, respectively. On October 1, 2011, the jumbo conforming limit of $729,750 in "high cost" areas was reduced to $625,500. On November 28, 2017, the US Federal Housing Finance Agency (FHFA) announced that the ceiling loan limit for one-unit properties in most high-cost areas will be $679,650 — or 150 percent of $453,100.

Risk

A mortgage broker is an intermediary between a lender and a borrower. Jumbo mortgage loans are a higher risk for lenders, mainly due to their larger size rather than credit quality. This is because if a jumbo mortgage loan defaults, it may be harder to sell a luxury residence quickly for full price. Luxury prices are more vulnerable to market highs and lows in some cases. That is one reason lenders prefer to have a higher

down payment Down payment (also called a deposit in British English), is an initial up-front partial payment for the purchase of expensive items/services such as a car or a house. It is usually paid in cash or equivalent at the time of finalizing the transactio ...

from jumbo loan seekers. Jumbo home prices can be more subjective and not as easily sold to a mainstream borrower, therefore many lenders may require two appraisals on a jumbo mortgage loan.

Costs

The interest rate charged on jumbo mortgage loans is generally higher than a loan that is conforming, due to the higher risk to the lender. The spread, or difference between the two rates, depends on the current market price of risk. While typically the spread fluctuates between 0.25 and 0.5%, at times of high investor anxiety, such as August 2007, it can exceed one and a half percentage points. It can be more expensive to refinance a jumbo loan due to the

closing costs Closing costs are fees paid at the '' closing'' of a real estate transaction. This point in time called the ''closing'' is when the title to the property is conveyed (transferred) to the buyer. Closing costs are incurred by either the buyer or th ...

. Some lenders will offer the service of an extension and consolidation agreement, so that a jumbo refinancer will not have to pay for mortgage tax again on the same principal balance. In other cases, title insurance companies will offer up to a 50% discount, often required by law for those refinancing within 1 year to 10 years. The largest discount is for refinancing within one year.

Role in US housing bubble

As house prices rose as part of the

United States housing bubble The 2000s United States housing bubble was a real-estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reac ...

, there was a large increase in the number of jumbo loan applicants. Due to rising prices, many consumers had to take out jumbo mortgages in order to buy modest homes in big-city areas; this option was no longer limited to high-end luxury residences. Many of these new loans were 40- or 50-year amortization, or had an interest-only option, similar to subprime loans. That meant that the jumbo loan borrower would pay the loan back over a longer period of time, or could defer any repayment of principal for a few years (thereby also increasing the total amount to be paid back). However from 2007, as prices fell and the number of foreclosures rose, lenders turned away from providing jumbo mortgages. Lenders that did remain in the jumbo loan market increased rates sharply, with rates up to 1.5 percentage points higher than for conforming loans. This withdrawal from the market led to a lack of lending available to fund the purchases of expensive homes, thus putting further downward pressure on house prices and completing a vicious circle. The delinquency rate on jumbo loans rose dramatically, tripling over the course of 2009, and by February 2010, almost one in ten jumbo mortgages were 'seriously delinquent' (i.e. in arrears by at least 60 days).Jumbo Mortgage ‘Serious Delinquencies’ Rise to 9.6%
- Bloomberg.com, February 8, 2010

References

External links

"Jumbo Loans Easier To Find" - The Wall Street JournalNew Loan Changes Bring No ReliefHousing & Lender InformationFannie Mae Loan Limits
{{DEFAULTSORT:Jumbo Mortgage Mortgage industry of the United States