Jumbo Mortgage
Jumbo mortgage loans are a special class of home loans in the United States. Lenders in the country sell their home loan portfolio to Federal Home Loan Mortgage Corporation (i.e., Freddie Mac or FHLMC) and Federal National Mortgage Association (i.e., the Fannie Mae or FNMA). These two government enterprises then convert these loans into securities and sell the debts in markets, effectively ensuring that the system does not run out of cash. While it did help in improving the economy of the country after the Great Depression, the system also led to the more recent real estate bubble.
Fannie Mae and Freddie Mac collectively define the maximum size of the home loan. This limit is referred to as the conforming limit for mortgage loans, and lenders are periodically notified about any revision to this limit. This limit is higher in States like Alaska and Hawaii. As of date, $417,000 is the limit applicable in many of States in the country. For places like the U.S. Virgin Islands, Guam, Hawaii, and Alaska, this limit stands at $625,000. Any home loan above these limits is said to be jumbo mortgage. They are not purchased by the two government agencies, unlike other home loans that come within the defined conforming limits.
Other essential characteristics of a jumbo home mortgage include higher interest rates, more down payment, and longer amortization terms. Jumbo mortgage loans are used for purchasing larger and luxury homes. Since Fannie Mae, and Freddie Mac do not buy these loans, the lenders have to absorb the risk of lending in this case. This is the reason they charge interest at higher rates. Other safeguard available to the lenders is the down payment. Therefore, the lenders also insist on higher percentage of the luxury home cost to be paid as down payment. There is another risk associated with luxury homes. There are very few people who can afford to buy them. Therefore, if there were any defaults, the lender would be forced to hold the property till a right customer could be found. Alternately, the lender may have to sell the property at a lesser price, absorbing some losses in the process. This is relevant because statistically, there are more defaulters in jumbo home loans category.
There could, however, be a reason for this. Prior to 2007, there was unprecedented rise in home prices. This led to prices of homes rising across the board. But corresponding increase in conforming limits for mortgage loan was not there. Though the two government agencies did increase the conforming limits at the time, this increase was not proportionate to the prevailing market conditions. This led to many home loans becoming non-conforming home loans, which added to the problems that were cause by sub prime crisis. Many people were forced to go in for jumbo mortgage loans, as the prices of homes at that point of time were such. This led to them accepting contracts that were really tough on their budgets, but they had no choice. When the real estate prices fell, most of these homes found their way into foreclosure lists as there were no takers and prices had fallen substantially, in some cases as much as 40 percent. Luxury homes are more susceptible to wider fluctuations in prices. This is the reason there were more defaulters in this category. About one jumbo loan borrower in every 10 is presently a defaulter.