'Jumbo' Loans Getting Smaller

Those jumbo loans that came with lower interest rates and smaller down payments may disappear any day now.


The Federal Housing Administration, Fannie Mae and Freddie Mac earlier this year announced eased underwriting standards for so-called "conforming jumbo loans" of up to $729,750 through December 31, 2008, thanks to a mandate by the Economic Stimulus Act of 2008.

Recently, however, all three agencies said they would roll back that temporary limit to $625,500 in 2009.

Many lenders won't wait for 2009 to roll back the limit, but will soon start, if they haven't already, to apply eased underwriting standards only to the new, lower loan level. Eased underwriting standards included lower interest rates and smaller down payments than those typically associated with so called "jumbo loans" before the stimulus act.

Beginning in January, the FHA will insure single-family home mortgages up to $271,050 in low cost areas and up to a maximum of $625,500 in high cost areas of Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

The new $625,500 maximum, however, represents a significant increase over the $362,790 limit that was in effect prior to the stimulus package, according to the U.S. Department of Housing and Urban Affairs (HUD) .

According to the Federal Housing Finance Agency (formerly the Office of Federal Housing Enterprise Oversight -- OFHEO), Fannie Mae and Freddie Mac will retain their $417,000 conforming loan limit for conventional loans, lower the temporary conforming jumbo limit of $729,750 to $625,500 for certain higher cost cities and counties and a set the maximum loan limit to $721,050, but only for Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

On the endangered species list in the mortgage world, $729,750 "conforming jumbo loans" experienced mixed reviews from risk averse lenders who never fully embraced the loans. Lenders buried under foreclosures, barely opened the doors to offer the loans until months after they were available. The larger the loan the greater the risk. The riskier the loan, the tougher it is for a home buyer to get the mortgage approved.

It wasn't until months after they were allowed, Fannie Mae and Freddie Mac announced they would purchase the larger conforming loans with the same requirements they use to purchase loans at the old conforming loan level.

Fannie Mae and Freddie Mac had also reduced down payment requirements on some loans to as little as 3 percent down. And new FHA loan plans with higher limits also helped put more big loan mortgage money on the market.

But as the economy sank into recession, the jumbo conforming loan at the $729,750 level never really managed a strong toehold.

"In today's environment where access to credit is being restricted, we need to make mortgage loans readily available to households throughout the country, and especially in high-cost areas," said HUD spokesman Steve Preston.

"These new loan limits will ensure FHA can to continue help struggling homeowners refinance into safe, affordable government-insured loans, and allow many first-time buyers take advantage of today's buyers market," he added.

Published: January 8, 2009