BUSINESS H O M E E C O N O M Y
Super-Sizing Embraced by Mortgage Consumers
Jumbo financing may be the only choice from the menu for big-ticket properties
By Joseph Finora Jr.
Got your eye on a big property? You may need a “jumbo” loan. The government will let you know. But who’ll give you the money?
In the eyes of the federal government, a jumbo loan is any loan on a single-family house for more than $417,000—not an unusual sum for East End property. Super jumbo home loans are used when purchasing or refinancing properties in excess of $1 million. In some markets, a house in this range is little more than a chicken coop. So why is a home loan in the mid-$400s classified a “jumbo”?
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), two governmentsponsored mortgage entities, publish new “conforming loan limits” each January. Loans exceeding the government-set limit are considered “non-conforming” and are classified as jumbos. (Properties with five or more units are considered commercial properties and are handled under different rules.)
The conforming loan limit is the maximum loan size eligible for purchase by either Fannie Mae or Freddie Mac, which “buy” the underlying securities from mortgage originators. That transaction initiates a new life for one’s mortgage, which is then passed on to waiting investors.
The Life of a Loan
With interest rates still low by historic standards and the money available to lend at healthy levels, there’s plenty of activity from both sides of the desk when it comes to jumbo loans. In fact, it’s this plentiful money supply and low interest rates that have largely been responsible for fueling the latest long-term wave in real estate appreciation, making more buyers interested in alternative financing that can offer the borrower several advantages.
Consider that many jumbo loans are processed with a relatively low (or no) down payment. This can be a key attraction to those who are already fully leveraged. However, because jumbo loans are bought and sold on a much smaller scale, they often have a slightly higher interest rate than conforming loans. This is one of their key drawbacks, but the “spread” between the two varies with the economy. And then, Wall Street often steps in.
“Generally, loans under $417,000, for single-family homes, are ‘sold’ after closing to agencies such as Fannie Mae and Freddie Mac,” says John A. Sauro, president of North Atlantic Mortgage Corporation. “These agencies do not have the appetite for jumbo and super jumbo loans. Therefore, they are ‘packaged’ and typically sold to Wall Street firms. These institutions then ‘securitize’ them in the form of Mortgage-Backed Securities (MBSs), making them available for investment on the open market.”
An MBS is a security based on a pool of underlying mortgages and is one of the most frequently issued forms of debt. While they are steadily popular investment vehicles, they do carry unique risks and are not suitable for every investor looking for a slightly competitive yield and stability.
Special Lenders
Many traditional lenders do not offer residential mortgage financing for super jumbo loans. So if you’ve got your eye on that land by the ocean, you’ll probably want to consult with a specialist. Jumbo loan documentation requirements, interest rates, and review processes are generally different and understandably can be more demanding than that for conforming loans, due to the amount of money involved.
Jumbo financing, however, can help some prospective buyers by providing greater flexibility and helping them make the payment they want. A jumbo loan can offer up to 90 percent financing and cut monthly payments by as much as 45 percent. Additionally, jumbo loan applicants are usually not required to provide income verification.
Jumbos can be particularly helpful for self-employed, professional or high-income individuals. Plus, there can be enhanced tax and pre-payment advantages and potentially increased cash flow that is not available with more conventional mortgages.
“Jumbo loans offer financing tools and techniques not available with conventional mortgages,” noted Mr. Sauro, a 25-year banking industry veteran and former Resident Expert on Financing at New York Academy of Law. “You should not trust financing for multimillion-dollar property to just anyone,” he cautioned, adding that $10 million loan requests are not unusual in this arena. “Understanding and structuring these loans requires expert knowledge, experience and a talent for negotiation.”