Hilton Head and Bluffton real estate borrowers often request loans of more than $417,000.  These loans are called jumbos.  Jumbo rates are higher than the rates of lower, conforming mortgages.  I want to explain just what has happened to jumbos recently and offer our best guess of what will happen for the near term.

Source: Bankrate.com

First of all, all mortgage lenders ideally prefer to sell the mortgage loans they make to others rather than hold them on their own balance sheet.  In a “normal” mortgage environment, loans can be bundled into mortgage backed securities and sold to investors.  However, with the current state of affairs in the mortgage industry, investors for jumbo loans have become scarce to totally non-existent.  When the lender makes a conforming loan, a loan in the amount of $417,000 or below, it can still be sold to either Fannie Mae or Freddie Mac.  Both of these agencies are backed by the federal government.  Because these loans can be sold, the rates on the conforming loan products have remained fairly low.  However, when a loan amount exceeds the conforming loan limit and without investor to buy the loan, the lender must hold the loan in their portfolio.  When a lender makes a residential real estate loan that they cannot sell, they are required by law to set aside three times the loan amount in reserve.  That is money that cannot be touched until the corresponding loan has been paid in full.  For example, if we at Wachovia make a loan of $1 million to a buyer of a Hilton Head villa, we have to set aside $3 million in reserve.   Because of this reserve requirement, the lender is forced to require a higher rate of return on the loan, thus the jumbo rates continue to climb.

Source: Bankrate.com

Recently Congress passed and the White House approved a new economic stimulus bill, a portion of which provided an increase of the conforming loan limit to $729,750.  As it turns out, the increase was only for designated “high cost” areas of the country, the majority of which are in Florida, California, New York, and Washington. DC - not Beaufort County.  As it appears at the present time, Beaufort County, SC will not see a direct benefit from this package with regard to the loan limit increase.  However, the stimulus bill should allow some owners in New York who want to move to Hilton Head or Bluffton sell their homes and relocate here.    

Going forward we do not look for any major change in the jumbo mortgage market for the near term.  Until all of the uncertainty has been worked out of the housing markets, investors for jumbo loans will continue to sit on the sidelines, leaving rates higher than all of us would like to see them.  It is important to remember, however, that if you are considering the purchase of a property that would require you to take out a jumbo loan, the current rate environment should not hold you back.  Based on where rates are at the present time, the monthly payment difference between a conforming and jumbo 30 year fixed rate loan is only $40 per $100,000 loan amount.  Also, it is very important to remember that this mortgage and housing environment will improve at some point in the future.  Nobody can tell you when it will occur, but when it does you will be able to refinance your loan to a better rate.  You won’t be able to go back and buy property at these low prices.  So, do not let today’s jumbo rates prevent you from taking advantage of a great deal on a home, villa, or lot. 

Should you have questions about jumbo loans or any other types of mortgage loans, please feel free to contact me via e-mail at pat.child@wachovia.com.

 Patrick S. Child

Vice President