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Signs of life in jumbo lending

Big banks compete with credit unions, community banks

Jumbo lending is staging a comeback of sorts, with major lenders once again buying the oversize mortgages from other lenders or allowing independent mortgage brokers to originate loans for them.

Bank of America and Wells Fargo had already been battling each other for market share in jumbo lending this year, with BofA announcing in March it was cutting rates to make more of the loans, which are too big for purchase or guarantee by Fannie Mae and Freddie Mac (see story).

Now JPMorgan Chase & Co. has resumed buying jumbo loans made by other "correspondent" lenders, and Citigroup is offering jumbo loans through mortgage brokers, Bloomberg reports.

Those practices, common during the housing boom, all but vanished when the secondary market for loans not backed by Fannie, Freddie and Ginnie Mae withered in August and September 2007.

"The whole market has improved in the last 90 days," said Terry Erwin, chief lending officer for KeyPoint Credit Union, a jumbo lender founded in 1979 to serve electronics industry workers in California’s Silicon Valley.

The lack of a secondary market has meant that lenders have to keep the jumbo loans they make on their book as investments. That can create capital constraints that limit lenders’ ability to make new loans.

Credit unions and community banks that are able to make jumbo loans against their customers’ deposits have reportedly been doing more business in many markets. Lenders that aren’t selling loans to Fannie Mae and Freddie Mac don’t have to deal with new rules for appraisals that real estate trade groups say are derailing sales.

But many jumbo borrowers are still paying higher interest rates and facing tougher underwriting standards on the loans than in the past.

Although jumbo loans have remained available to borrowers with good credit making sizable down payments, rates for jumbo loans have been 1 percent to 1.5 percent higher than conforming loans, and many lenders are expecting FICO scores in the 700s.

Erwin said KeyPoint competes with Bank of America and Wells Fargo for jumbo borrowers in the San Francisco Bay Area, tracking their rates and fees.

"We try, if we can be, to be within a quarter (percent) or the same" as its larger competitors, Erwin said.

To address the potential liquidity shortage, lawmakers last year allowed Fannie, Freddie and the Federal Housing Administration to guarantee loans of up to $729,750 in high-cost housing markets.

The upper loan limit, which had previously been set at $417,000 for Fannie and Freddie, was briefly rolled back to $625,500 on Jan. 1 amid false expectations that the secondary market for jumbo loans would make a comeback. The limit has since been restored to $729,750 (see story).

Although so-called "super conforming" loans between $417,000 and $729,750 are cheaper than jumbo loans that can’t be securitized and sold to secondary market investors, Fannie and Freddie have imposed additional conditions on them.

The guidelines published by Fannie and Freddie in March and April generally require that borrowers have FICO scores of at least 700 and provide at least a 10 percent down payment. Freddie Mac requires down payments of at least 20 percent for loans above $625,500.

Super-conforming loans backed by the Federal Housing Administration allow borrowers to make down payments of as little as 3.5 percent. The trade-off is that those borrowers will pay additional mortgage insurance premiums that are based on the size of the loan.

With Fannie, Freddie and Ginnie Mae helping provide liquidity in the super-conforming jumbo market, sales of high-end homes in high-priced California markets picked up in May (Ginnie Mae guarantees payments on mortgage-backed securities backed by the Federal Housing Administration).

In the nine-county San Francisco Bay Area, sales of homes financed by mortgages larger than $417,000 accounted for one in four sales, the highest proportion since October, MDA DataQuick reported. Those numbers were a far cry from two years ago, when sales of homes financed by jumbo mortgages accounted for more than 60 percent of sales in the region.

In Southern California, roughly 12 percent of home sales in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties were financed with jumbo loans in May, compared with 40 percent during the boom (see story).

Turning to credit unions

Eileen Bartlett, a California licensed real estate broker, says jumbo lending never went away. But for a while, "people didn’t know where to go to get the money." …CONTINUED