Jumbo Loans Loom Large in Luxury Housing Market

small house and piggy bank with ...

By Beth Pinkster

The view of the Pacific Ocean from the San Joaquin Hills in the California community of Newport Coast is extraordinary. So, when Mohammad Taghavian started looking for a new home four years ago, he knew exactly where he wanted to be. The housing market, however, wasn't so cooperative.

Taghavian, a 47-year-old engineer, jumped at any property that came on the market, only to find that whatever he bid, he was "edged out by a cash offer," he says. He did what a keen home buyer would do. Taghavian kept raising his offer, from $600,000 to over a million. That placed him in jumbo mortgage territory -- above $625,500 in his part of the country, and above $417,000 in lower-priced areas.

His real estate agent, Michael Salas of Coldwell Banker, honed in on one development and went on a letter-writing spree to about 60 homeowners with ocean views. When a $1.4 million townhouse finally came on the market last year, Taghavian snagged it. He moved into his dream home just before the new year.

For buyers like Taghavian who are looking at luxury properties that require jumbo mortgages, 2014 is already a banner year, industry experts say. Interest rates on jumbo mortgages used to tower over conventional mortgages because they are considered riskier. But the rates for jumbos have dropped because of economic conditions, and are now almost on par with conventional mortgages -- or sometimes even lower. In addition, new federal regulations that went into effect in January don't apply to jumbos, making them more flexible for buyers who want things like interest-only loans or who have a high net worth but complicated finances.

This convergence of factors is helping move along the housing market recovery, says Harvey Grossberg, membership director of the National Association of Mortgage Professionals. Because jumbo mortgages are so enticing, they are luring homebuyers to consider "move-up" purchases, which, in turn, frees up inventory at the lower end of the market.

"It's just been a great situation where you had a combination of low interest rates and appreciation," Grossberg says.

Rate Parity: The typical spread between jumbos and conventional mortgages is a quarter of a percentage point or less, compared to a half point or more in 2010. For instance, Grossberg, who brokers mortgages in Orange County, Calif., recently completed two refinancings for a client who had a main residence and a resort property, one a jumbo mortgage now at 4.75 percent, and the other, a conventional one at 4.5 percent. In some cases, the rate parity actually flips, and jumbo mortgages are actually lower, depending on the credit-worthiness of the borrower and the length of the loan.

Until recently, banks kept jumbo mortgages on their balance sheets, instead of selling them on a secondary market. Tom Wind, executive vice president of home lending for EverBank Financial Corp which originated $800 million of jumbo loans in the fourth quarter of 2013, says this is happening because banks keep jumbo mortgages on their balance sheets, instead of selling them on a secondary market. With interest rates low, banks are luring buyers with discounts of an eighth of a percentage point or more.

Even when buyers have enough cash, it can make sense to finance a home purchase with a jumbo mortgage. Denise Andres, a real estate agent for ERA Landmark in Bozeman, Mt., had a client who recently downsized from a $3 million property to a $1.2 million one, and got a jumbo mortgage at a 4.125 percent interest rate on the purchase, instead of paying all cash. "His thought was, with the gains in the stock market, why would I want to pay all cash if I can get 30-year money so low?" she says.

Flexibility: Do you want an interest-only loan? Do you have income that's complicated by stock options or lots of assets that are hard to quantify? Are you keen to put down a down payment of less than 20 percent? You're going to want to go jumbo.

The new qualified mortgage regulations, enacted as part of the Dodd-Frank financial reforms, require strict debt-to-income and loan-to-value ratios, which determine how much mortgage you can afford and how much you have to put down. These and other stringent underwriting rules protect conventional mortgage borrowers and allow them to hold the banks accountable if there are problems down the line. Jumbos don't have the same protections, and rules remain at the discretion of the lending institution.

Underwriting is still tough, because of the large loan risk, but banks can be more flexible with their offerings, says Joe Rogers, executive vice president for Wells Fargo Home Mortgages, one of the largest jumbo lenders in the United States. This is especially useful for clients who might have variable or low W-2 income compared to their overall net worth, says Rhonda Hummel, a senior loan officer with First Capital Mortgage in Newport Beach, Calif., which includes Newport Coast.

Not Just About Desire: Such flexibility first stymied -- then helped -- Mohammad Taghavian. He got really frustrated when his lender repeatedly went over the value of his stock options, before eventually accepting them as a portion of his assets.

Another clause that aided Taghavian was a "departing residence" exclusion, which meant he was able to rent his existing home and count 70 percent of that income toward his bottom line. Otherwise, he would have had to sell the property, bought at the peak of the housing market, a time-consuming effort that wouldn't have netted him the profit he was after.

"I really wanted that particular area, and it pushed me to get a jumbo loan," Taghavian says. "But you have to calculate the risk, because everything is not just about what you desire. At the end of the day, you have to make the payments."

Going back over his financial records, he decided he could do it, and the bank agreed.

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