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Jumbo Loans: What They Are & Who Needs Them
Jumbo Loans Explained
Jumbo loans (aka Jumbo Mortgages) are home loans that exceed conventional, conforming home loan limits. They are typically taken out by homebuyers purchasing properties over a certain amount. The exact amount is set by the Office of Federal Housing Enterprise Oversight (OFHEO).
What is a Conventional Home Loan?
What constitutes a “conventional home loan” is in large part determined by the secondary lending market giants – Fannie Mae and Freddie Mac. As of this writing, if you take out a home loan for $417,000 or less (for certain properties in certain locations), you are taking out a conventional home loan, not a jumbo loan.
Why is this important?
If you’ve ever bought a home then you know that no sooner than you sign your mortgage papers, usually before you can send in your first mortgage payment, the lender has changed. This is because your home loan was likely sold to another lender in the secondary market. This secondary home loan market is dominated by Fannie Mae and Freddie Mac, who securitize conventional home loans.
But, this can’t happen with jumbo loans. They can’t be purchased, guaranteed or securitized by Fannie Mae (Fannie) or Freddie Mac (Freddie). Because they are considered higher-risk home loans than conventional mortgages, they are securitized by institutions other than Fannie and Freddie.
What Exactly are Fannie and Freddie?
The Federal National Mortgage Association (FNMA), aka Fannie Mae, is a stockholder-owned corporation chartered by Congress in 1968. It is a government agency that was founded during the Great Depression. The reason it was created was to buy and securitize mortgages, helping to ensure that when potential homeowners wanted to borrow money to buy a house, the funds would be available for institutions to lend.
The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac is another government agency whose purpose is to help the American homeowner.
Formed in 1970, it purpose was to expand the secondary market for home mortgages. The way Freddie works is, it purchases mortgages on the secondary market, then bundles them with other mortgage-backed security instruments, and sells them to investors on the open market.
By doing this, Freddie helps to increase the amount available to financial institutions (eg, banks) to lend to prospective homeowners. The name, "Freddie Mac", is the acronym for the company's full name, which was adopted for ease of identification.
In September 2008, Fannie and Freddie were put under the conservatorship of the Federal Housing Finance Agency (FHFA). At the time, this was described as "one of the most sweeping government interventions in private financial markets in decades.”
How OFHEO Determines What Constitutes a Jumbo Loan
This changes annually, as OFHEO sets the conforming loan limit size on yearly basis. So your jumbo loan amount may be different from you neighbor’s if you took them out in different years.
Jumbo Loans: What Amount Constitutes This Type of Loan
Again, this varies annually. It can also vary according to the type of property and where it is located. Following are some jumbo loan amounts from past years, just to give you some ideas of what I mean.
In 2006, the limit was $417,000, expect in Alaska, Hawaii, the U.S. Virgin Islands and Guam, where it was $625,500.
The 2009 conforming loan limits were:
- 1-unit properties : $417,000
- 2-unit properties : $533,850
- 3-unit properties : $645,300
- 4-unit properties : $801,950
All loans in excess of the amounts listed above for the types of properties listed above are some type of jumbo loans (ie, jumbo or super jumbo, depending on amount).
Note: Left over from the Economic Stimulus Act of 2008, certain “high-cost” areas in the U.S. have their own conforming loan limits – none of which can exceed $625,500. There are 59 of these areas across the nation, although most are located in California.
Jumbo Loans and Refinancing
Typically, it’s harder to refinance jumbo loans than conventional home loans. The refinancing rates tend to be a bit higher. This is because lenders who initiate jumbo and super jumbo loans typically have a harder time selling them on the secondary market, where the resale of mortgages provide money for new home loans.
Learn more about jumbo loans.
Jumbo Loans: Food for Thought
Since 1980, conforming loan limits have adjusted up, along with the increase in housing prices. However recently, as home prices have decreased, the conforming loan limit has not.
What many homeowners don’t know is that prior to organizations like Fannie Mae and Freddie Mac, there were no 25 or 30-year mortgages, which means there was no need for money to be circulating around for potential homeowners to borrow.
Most homeowners outright bought their houses or came up with a significant down payment -- something like 25-50%. They then paid off the rest in a relatively short period of time (eg, 10 years).
Considering the foreclosure crisis that started in 2007, it’s something for all of us to think about. Maybe there wouldn’t be such a thing as jumbo loans if this type of fiscal responsibility was practiced nowadays, no?