After more than two years of misery in the housing market, the worst may finally be over.
Private lenders and the federal government have reinvigorated the jumbo mortgage market, making bigger loans more available to more borrowers. And in general, a would-be homeowner can now qualify for a loan with lower credit scores and make a smaller down payment -- in some cases, as low as 5%. Those moves, taken together, mean that more borrowers have access to mortgages, a necessary precondition for housing to rebound.
"When you see those moves on the upswing, it gives you a hint of what's coming later on," says Chip Cummings, the president of Northwind Financial in Grand Rapids, Mich., a consulting firm for mortgage and real-estate companies.
And without a drop in unemployment and other economic improvements, demand for the new mortgages may not keep pace with supply. But the moves do suggest that lenders, at least, are more willing -- and the easier it is to get a loan, the easier it is to get a house.
Here's a closer look at the three changes:
More jumbo mortgagesBefore 2007, jumbo mortgages -- any loan over $417,000 in average markets -- made up 22% of the mortgage market. Today, they're about a 6% sliver. But private lenders are getting back into the jumbo market. These supersize loans were up 3% from January to May, according to the most recent data available from CoreLogic, a mortgage data company. Wells Fargo almost doubled its jumbo lending, to $3.7 billion, in the second quarter, compared with a year ago, and Chase was up 16% for the same period with plans to keep growing.
The sheer size of these loans suggests more risk for the lender. (If the borrower defaults, the lender could take a bigger hit.) But for the high-quality borrower, it is a risk the banks now seem willing to take, says Keith Gumbinger, a vice president at HSH Associates, a mortgage data tracking company. If foreclosures are low, private lenders are likely to extend jumbo mortgages to a broader group of borrowers in the next year or so. Meanwhile, smaller local lenders have also gotten into the market, Cummings says.
For better borrowers, this means more options. A Fannie- or Freddie-backed mortgage can go up to $729,750, but private lenders can go higher when they keep the loan on their books -- an advantage for someone house hunting in expensive cities such as New York, Boston or Washington (and a potential boon for those housing markets overall). Interest rates on jumbo mortgages backed by private lenders are about 1 percentage point higher than those backed by the government.