Jumbo home loans set to play bigger role for U.S. buyers

Should you be concerned that the maximum loan amount you’ll be able to obtain through the biggest players in the mortgage industry — Fannie Mae and Freddie Mac — might be cut sometime next spring? You just might.

That’s because mortgage applicants who no longer qualify under the revised limits will be forced to shop in the so-called jumbo arena, where minimum credit scores and financial reserve requirements tend to be tougher and down payments heftier than in the conventional space dominated by Fannie and Freddie.

You might also have to settle for an adjustable-rate mortgage rather than a fixed-rate. Or you might end up in a situation where you need a higher-rate “piggyback” second mortgage in order to afford the down payment on the first mortgage deal you’re offered.

Here’s a quick overview of what could push eligible loan amounts downward and what that may mean for thousands of buyers across the country who abruptly find themselves in jumbo land.

At a meeting in Washington last week, Edward J. DeMarco, acting director of the agency that oversees Fannie and Freddie in conservatorship, said he is seriously considering reducing loan maximums as part of a strategy to lessen federal involvement in the mortgage market. Though he offered no specifics on dollar amounts, industry analysts say the maximum Fannie-Freddie loan size could drop from the current $417,000 to $400,000 in most parts of the country, and from $625,500 to $600,000 in designated high-cost areas such as coastal California, metropolitan Washington, D.C., New York City and its suburbs, parts of New Jersey, Massachusetts, New Hampshire, Colorado, Idaho, Wyoming and North Carolina. The decreased limits could be announced next month and take effect as early as May.

Those decreases may not sound like much, but they’ll have an impact on large numbers of consumers who want to purchase homes with prices above the average for their areas, especially newly built houses. Real-estate and lending groups are concerned that making mortgage money tougher to obtain — pushing buyers into a segment of the market where Fannie and Freddie cannot operate — is counterproductive in a housing economy still struggling to recover from bust and recession.

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There’s another, perhaps more important problem here as well: Reducing loan amounts next spring would complicate what is already shaping up as a challenging lending environment for consumers in 2014, critics say. Starting in January, new federal regulations that restrict debt-to-income ratios and allowable total fees in “qualified” mortgages will take effect and make significant numbers of applications ineligible for Fannie-Freddie loan terms. Some industry estimates suggest that as many as one in five borrowers this year could not pass the qualified mortgage tests scheduled for next year.

Though DeMarco appears determined to lower the loan ceilings for Fannie and Freddie, congressional critics contend that he lacks the statutory authority to do so. A bipartisan group of 66 House members sent a letter to DeMarco arguing that he is prohibited by “specific language” in an economic stimulus law passed in 2008 from lowering the limits set by Congress. DeMarco’s legal team disputes that interpretation.

The fight over Fannie-Freddie loan limits focuses fresh attention on what could become a much more significant piece of the market — jumbos. Because they are larger than conventional mortgages — ranging anywhere from just above $417,000 to seven figures — jumbos traditionally have come with extra costs and underwriting restrictions. Though jumbo interest rates now average just slightly above conventional rates — roughly 4 1/8 percent for a 30-year fixed last week — they often require stellar FICO credit scores in the upper 700s, down payments of 20 percent or more, and lots of spare money in the bank. Fannie and Freddie loans, by contrast, are less restrictive and allow down payments of 5 percent to 10 percent with mortgage insurance.

Some lenders are beginning to relax their jumbo terms, however, and are offering smaller down payment options. Ted Rood, senior mortgage consultant with Wintrust Mortgage in St. Louis, for example, said his firm can do jumbos with down payments as low as 10 percent but at a slightly higher interest rate than jumbos with 20 percent to 30 percent down.

Bottom line: If you’re thinking about buying — or selling — a house with an above-average price for your area next year, think jumbo mortgages. They may be your main, or only, financing option.

Kenneth Harney is a syndicated real estate columnist.