Jumbo Mortgages

The generally accepted definition of "jumbo" would be those residential mortgages that are not "conforming mortgages," i.e., they exceed the $252,700 maximum loan size that will be purchased by the government-sponsored organizations Fannie Mae and Freddie Mac. Super-jumbo mortgages are those exceeding $650,000.

Rising prices and incomes have created a growing market for jumbo mortgages. According to data that were compiled by Inside Mortgage Finances from the Home Mortgage Disclosure Act, jumbo mortgage originations in 1999 rose to $364.45 billion, or 25 percent of all residential mortgage loans, up from 18 percent four years earlier. It is probably not surprising that 38 percent of these loans originated in California. The demand for jumbo mortgages has been increasing in such areas as Orange County, CA, San Francisco and New York. Even in relatively small cities, there is a need for jumbo mortgages. In her article in the most recent issue of Independent Banker, Kristine M. Newkirk cites the experience of the State Bank of Cross Plains, WI. Even though the median price of single-family homes is $174,000, ten percent of the bank's mortgages are jumbos.

The market for jumbo mortgages provides a good example of the economic issues involved in pricing non-uniform goods and services. One might think that jumbo mortgages are especially low risk and that there are economies of scale in making such mortgages. One jumbo mortgage might be equal to two or three conforming mortgages. But this is not the case. Because they are more diverse than conforming mortgages, they are often more costly than conforming mortgages for several reasons.

First, secondary market options are more limited for institutions investing in jumbo mortgages. Just as the retail market for jumbo mortgages is diverse, so is the wholesale or secondary market. Each wholesaler has slightly different preferences and terms. Each borrower has a unique credit report, employment record, and income. Consequently, it is more expensive to sell jumbo mortgages. Before setting the terms of the loan, the bank must shop among lenders on behalf of each borrower to determine the provisions that would be mutually acceptable to the borrower and the ultimate lender. Therefore, it is not surprising to find that interest rates on jumbos are actually higher than rates on conforming mortgage loans. While the gap in rates between jumbo and conforming loans has narrowed somewhat, rates on jumbos are still one-eighth to three-quarters of a point higher.