Lisa Simpson
Aug 12,2009
In: Finance

Jumbo Lending Is Back; Fannie and Freddie Mae Provide the Liquidity

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Jumbo lending is back what with big lenders buying large mortgage from others or initiating a process by which independent brokers can give loans to them.

Bank of America and Wells Fargo have been jostling with each other for a larger pie of jumbo lending market. Bank of America says that it has announced rate cuts so as to be able to take more loans which are too big for Fannie Mae and Freddie Mac.

JP Morgan Chase & Co has also started buying these loans. Citigroup is offering these loans through brokers. These practices had become very common during the real estate boom in the US. But these withered when the secondary market for loans was not given support by Fannie, Freddie and Ginnie Mae. This happened in September 2007.

Terry Erwin, chief lending officer of KeyPoint Credit Union, says the jumbo lending market has picked up in the last three months. This company was founded in 1979 to industry to serve workers in Silicon Valley, California.

The absence of secondary market means that lenders show the jumbo loans in their account books as investments. This in the long run can make it difficult for lenders to incur new loans.

It has been noticed that community banks and credit unions that have been able to lend money against deposits of customers are doing brisk business. However, jumbo borrowers are paying higher rates of interest and are facing more stringent underwriting standards on loans than ever before.

Borrowers who have good credit rating can make jumbo loans. The rates for these loans are 1 to 1.5 per cent higher than traditional mortgages. Erwin says KeyPoint has to compete with Wells Fargo and Bank of America for borrowers in San Francisco Bay region.

For sometime, there has been a shortage of liquidity in the market. Hence, law makers allowed Fannie and Freddie to give loans amounting to $729,750 in expensive housing markets. The upper limit for loans had been put at $417,000 for Freddie and Fannie. This was increased to $625,500 in the hope that the secondary loan market has staged a comeback. Now it has again been reset at $729,750. According to Fannie and Freddie guidelines that borrowers must have FICO scores of 700 at least. Also they should make a down payment of 10 per cent at least.

As Fannie, Freddie and Ginnie Mae provide the much needed liquidity in the jumbo market, home sales in high-end markets have picked up.

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