Jumbo Conforming Loans: Tougher Standards Than Conforming Loans

Effective April 1st and for the rest of 2008, Fannie Mae and Freddie Mac will be buying loans above the current limit of $417,000. The is a result of the economic stimulus package signed by President Bush on February 13th. They will begin purchasing Fixed Rate Mortgages on April 1, 2008, and hybrid ARMs on May 1, 2008. Due to the length of time it's taking to actually fund said loans, several major lenders are now offering the opportunity to register and lock the new loans. The new limits, which vary by Metropolitan Statistical Area, do not appear on either Fannie or Freddie's web page yet, but the FHA Mortgage Limits page seems to have correct data for every county I checked, which was about four counties.

Fannie and Freddie have recently announced their policy as to what they will and will not fund as far as these loans go. In fact, Fannie seems to be taking the lead, issuing the letter I've seen.

The standards are significantly more restrictive than Fannie and Freddie's standards for conforming loans. The first difference is no automated underwriting, at least not yet. You have to live and die by the specified underwriting standards, including debt to income ratio, which under automated underwriting I've seen much higher than guideline approved for people with stable income like government pensions, good assets and good credit. Here's the quote:

All loans must be manually underwritten. The jumbo-conforming loan limits, eligibility, and underwriting guidelines will be added to Desktop Underwriter® in a future release.

Keep in mind that that the Jumbo Conforming loan, as currently written, expires at the end of 2008. I suspect there'll be some sort of extension going in to 2009, but at this point there is no guarantee there will be anything. For those who are wondering, this doesn't mean the loan will vanish or anything. It just means that there won't be any new ones funded after that unless something happens to extend the program - which I do expect but cannot guarantee. It would be pretty pointless to have this be one of the keystones of the economic stimulus package if everybody concerned intended to let it collapse at the end of the year - and the Federal Reserve, at least, knows that.

The written standards themselves are more strict as far as loan to value ratio goes. Freddie (at least) is still perfectly willing to buy mortgages at 100% financing for purchase money conforming loans - it's just the actual lenders who are not willing to fund them in the first place. Credit scores down to 620 are at least theoretically possible for conforming loans, but "jumbo conforming" purchases are limited to 90% with a credit score of 700, 80% with a credit score of 660. Those are fixed rate. hybrid ARMs are limited to the 80%, and require a 660 credit score. For Fannie and Freddie's "Limited Cash Out" definition, which is essentially a rate term refinance, 75% is as high as they will go. Cash Out Refinances, Fannie and Freddie won't buy, even on a primary residence. On second homes and investment property, 60% is as high as they will go, even for purchase money or "limited cash out".

For Jumbo Conforming, all housing debts must be in "0x30" status for the past twelve months, which is mostly a little bit stricter than the conforming standard. This means that you can't have any rent or mortgage payments that were 30 days or more late - not just on this property, but on any property you owned or rented in the last twelve months.

Thus far, the only two loan products that I'm certain will be included are the fully amortized fifteen and thirty year fixed rate loans, and the fully amortized 5/1 ARM. The 5/1 Interest Only for ten years that they have also included is not a standard loan product. The 7/1 and 10/1 appear on some rate sheets, though, so I'm thinking that the specifications are minimums: In other words, it must be fixed rate for at least five years, it must begin amortizing within 10 years. Indeed, I've just had this mostly confirmed by a couple conversations with wholesalers. Also, interest only fixed rate mortgages are specifically disallowed, but The Word is that interest only periods of up to 10 years are acceptable for those as well, and that the prohibition applies only to fixed rate loans that don't begin amortizing for longer than ten years. For instance, a loan that was unamortized for its full term would be unacceptable to Fannie and Freddie, which is nothing new. Fannie and Freddie have always required that the client begin actually paying off the loan at some point be built into the loan structure.

Some folks are making a big deal out of "no consolidation of existing first and second liens," in the guidelines, but that just goes to show how little A paper they've done these last few years. That's a standard criterion for Fannie and Freddie's Limited Cash Out refinances. So anyone that has an existing Second Trust Deed is going to have to subordinate the existing loan. I don't know that refinancing each loan simultaneously would be rejected, but the Official Word I have is that Subordination Is Your Only Option. That would be a loan killer if the current second mortgage holder refused.

Residential mortgages are for 1 to 4 units, but for Jumbo Conforming loans, Fannie and Freddie won't buy anything financing more than one inhabitable unit. Condos, townhomes, and PUDs are all fine, but no two, three, or four unit properties under a single title or deed of trust. Interestingly, Co-ops are also disallowed by the guidelines for Jumbo Conforming loans.

Finally, rates are higher than regular conforming rates. For fixed rate mortgages, there's a minimum of a quarter of a percent hit on the rate, as opposed to regular conforming mortgages. That's a price hit direct from Fannie and Freddie. The actual differences on the price sheets I've gotten are much higher than that. The thirty year fixed rate loans seem to be about 1.25% higher for the same cost as conforming, the fifteen year fixed rate about 1.5%. That the differential is actually higher for the shorter term loan is astonishing to me, and I can't think of a reason why at the moment. For hybrid ARMs, the pricing adjustment from Fannie and Freddie is three quarters of a percent, and the actual difference seems to be about 1.75% higher for the same cost. However, for fixed rate loans, this is about 1 full percent lower than regular "non-conforming" rates, while the "non-conforming" rate pricing for hybrid ARMs seem pretty similar to jumbo conforming. For fixed rate mortgages, at least, this provides a constructive alternative for full documentation type loans above the regular conforming limit, which have suffered severely by association with stated income loans these past several months. They're no longer completely joined at the hip. Now, up to San Diego's limit of $697,500 anyway (limits in your area may vary), full documentation loans are going to get a better loan than "stated income" borrowers.

I've had my suspicions from day one of this whole thing that Fannie and Freddie don't really want to fund these loans, but they want to stay on Congress' good side in case they ever need something. There's no longer a legal commitment that the US government will backstop Fannie and Freddie as far as losses go, but there is a strong feeling that they will, and doing the bidding to Congress at least this much gives them the moral ability to go to Congress for relief if this all goes south on them. "We did this because you wanted us to!" may not obligate the taxpayers directly, but many corporations have received public assistance on far weaker claims - while if they refused, Congress could well decide not to bail out what are, in fact, privately held corporations that are run for profit. So Fannie and Freddie have made the fact that they're not happy with this quite clear to those with the skill to read between the lines - but they're going to go along as far as they are with what the government wants them to do, because you're never certain that you won't need help somewhere along the line.

Caveat Emptor

UPDATE 5/8/2008: Fannie and Freddie have changed things a bit, and now the temporary Jumbo Conforming Loan rates have dropped like a rock, to the point where there's only a quarter to a half point difference in cost between them and regular conforming at the same rate. Now that will make a difference for full doc borrowers. Stated Income is non-conforming, and those rates are still significantly higher. I've said all along that Jumbo borrowers were suffering by association with stated income, due to the fact that both traditionally used the same rate table for A paper borrowers. Now that Jumbo Conforming loans have broken that association, the rates (up to the new limit) have dropped. This is about as surprising as gravity.