How to get a jumbo mortgage now?

By most measures, the housing market’s recovery has been slow. But private-market “jumbo” mortgages—larger, higher-cost home loans that aren’t guaranteed by the federal government—are making a much faster comeback.

Private-market jumbo loans accounted for about 15% of the total dollar amount of mortgages distributed by Bank of America Corp. (US:BAC)  -1.10%during the second quarter of 2012, up from 4% a year earlier, says a spokesman for the bank.

At Wells Fargo & Co., (US:WFC)  -0.06%private jumbo volume more than doubled in the first half of the year from the same period last year, according to Brad Blackwell, portfolio business manager for the bank’s home-mortgage unit.

Citigroup Inc. (US:C) -0.47% also says it has increased jumbo lending.

In all, lenders doled out $38 billion in private jumbo mortgages during the second quarter of 2012, up 65% from a year earlier, according to new data compiled by Inside Mortgage Finance, a trade publication. That is the highest quarterly dollar amount since the first quarter of 2008.

“This is a real positive for the entire marketplace, and hopefully this is the first sign that credit markets will open up,” says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

Unlike smaller mortgages, many jumbo loans aren’t eligible to be purchased by the governmental-chartered agencies known as Fannie Mae and Freddie Mac, so they tend to be more expensive for borrowers. In most of the country, private-market financing is needed for loans exceeding $417,000; the cutoff points are higher in more expensive markets.

Demand for these loans has been driven in part by a surge in luxury home sales. Sales of $1 million-plus homes rose 19% in July from a year earlier, according to the National Association of Realtors.
But private jumbo mortgages also have become more affordable than in the past. Rates on 30-year jumbos now average 4.22%, down from 4.82% a year ago and 5.27% two years ago, according to HSH.com, a website that tracks mortgage data. Those rates are currently about half a percentage point higher than those on regular mortgages; in 2008 and 2009, that spread was more than twice as wide.

For lenders, says Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington, the appeal of jumbo loans is clear: They are more profitable.

Despite the recent rate decreases, private jumbo mortgages still provide a bigger-than-usual spread between the interest banks receive and what they are paying on deposits.

Because they keep most of these loans on their own books, the lenders incur all the losses if a borrower defaults. Keith Gumbinger, a vice president at HSH.com, says lenders have been able to take on such risks because their balance sheets are in better shape and because they are subjecting borrowers to rigorous screening.

Borrowers typically need a 20% to 25% down payment on a private jumbo loan, and on mortgages over $1 million, that can jump to 30%, says Joel Berinson, president of Ultra Mortgage, a mortgage broker in Marlton, N.J. Still, Berinson says his firm has sold roughly 30% more in private jumbos so far this year than it had at this point last year.

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