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Jumbo loans are an investment tool they’re not for the average borrower. Or so we thought. Today, however, thanks to the boom in real estate prices, and the ever declining value of the dollar, more and more average consumers are applying for these jumbo loans, and using them to finance a home purchase.
The most typical area to see the home prices rising to a level that makes a jumbo loan necessary is in your resort area housing. Many of these homes have escalated tremendously in price over the last couple of years, and the loan needs have risen to all time highs. The jumbo loan has now become a real mortgage product, not just an investing tool.

Before we get too deep into the real estate market, and the use of the jumbo loan, perhaps we’d better define the jumbo loan and the consequences of financing your mortgage in this manner.

The jumbo loan is a loan amount that exceeds $359,651. In fact, this is the defining characteristic of the jumbo loan. The other “baggage”, if you will, that often accompanies these loans, is the large amount of paper work, higher private mortgage insurance, and the higher interest rate. It might also be interesting to know, that Freddie Mac and Fannie Mae, the two largest mortgage buyers in existence today, usually establish these limits, and dictate to many lending companies exactly what they will buy, and how. It should not need to be mentioned that these loans present a bigger risk than the other, traditional loan needs, and therefore must meet some rigorous requirements.

Now, having explained the definition of the jumbo loan, it deserves to be said that there are alternatives to avoid this type of loan, and still secure the funding you need to purchase a home, without using all your life’s savings to do so.

The jumbo loan can be broken down into a first and second mortgage, negating the need for a jumbo loan, and cutting through all the extra paperwork and interest expense. But, that’s another discussion. Another option homeowners have for avoiding the jumbo loan trap is to simply put enough down on the home to keep the amount financed below a certain level.

To further explain the role Freddie Mac and Fannie Mae play in the determination of the jumbo loan limits and expense, you need to understand how the mortgage market actually works, and the role these two companies play in that process. Today, if a mortgage company loans you money to purchase a home, you sign a waiver that states that you understand that your loan may be sold to another servicer. They should simply have you sign a form that says you know your loan is going to be sold; who is it? Freddie Mac and annie Mae.

The mortgage companies find it necessary to resell your mortgage, in order to make another one. So, quite naturally, they must abide by the rules established through the buying companies. Jumbo loans can prove quite risky, so Freddie Mac and Fannie Mae don’t even purchase these types of mortgages. For the mortgage companies that do, there are set limits, and they require more information, larger proven income levels and adequate private mortgage insurance to assure that the home won’t go into foreclosure and auction.

In some areas of the country, there have been increases in the jumbo loan limits, simply because the housing market and home prices are so high, every home purchased would be a jumbo loan, if the limits weren’t extended. Most of these areas are resort homes, vacation homes, and property is scarce.

What is happening today, however, is the growing segment of the population that really needs the jumbo loan financing in order to buy their home; not make a business investment. What does this say about our real estate market, and the value of the property? Our real estate prices are increasing at an astonishing rate, and right along with that, is the increase in products being offered by the mortgage lenders, therefore, it only stands to reason that we would see an increase in the jumbo loan market. The current estimate for the jumbo loan market is generally around 15%; that is still a pretty large hunk of the mortgage market.

Have you ever noticed if given the choice, day average consumer is going to buy as much as possible on as little as possible. Now that’s okay if you happen to be buying an air conditioner, or a pair of shoes or a pair of blue jeans; but when it comes to your home mortgage, bigger is not always better. In the real estate market of today there are many analysts all both sides of the fence that will argue for or against the interest only option and the effect it has on consumer spending.

Right now the vote is still out on exactly what it will cost the taxpayers should we experience a tremendous drop in real estate prices. During the first half of the century the interest-only loan was used extensively. When the Great Depression began, unfortunately, many homeowners who had made use of the interest only loan lost their homes. Today, the interest only loan quarters a full one fourth of the market segment, and that kind of growth is frightening to every economist associated with the real estate market. Why does this kind of growth frighten an economist? The answer is simple: exploding growth in real estate that creates this type of loan market growth is not always stable.

Now, what happens to the consumers who have purchased the interest only loan and the real estate prices drop? What if they owe more now than their property is worth? See, this is where the economist gets really frightened. Defaults on loans, bankruptcies, and a tremendous burst of the real estate bubble could be the resulting conditions.

What else has happened here? Once again consumers have managed to overspend themselves and live beyond their means. Apparently in an optimistic and booming economy this seems to be all right, but when the economy takes a downturn and real estate prices drop, what happens to the consumer with the interest only loan, and no equity? I will tell you what happens. Homeowners can no longer support the mortgage, or rather the real estate value can no longer support the mortgage, and when it is time to refinance a home there is more mortgage than home. In the defense of the homeowner, many of today’s mortgage lenders refuse to counsel the consumer about the real consequence of borrowing beyond the value of the home, or borrowing without investing in the value of the home. Eventually, living beyond your income levels will result in a negative impact.

Consumers don’t often consider the worst case scenario especially during the time of purchasing a mortgage product. No one assumes the worst; everyone likes to imagine that everything will work exactly as planned. But if your monthly mortgage payment stretches you to the limit and if the budget doesn’t leave room for reserve, you’re going to find that at some time you’ll be short. If you’re using the interest only mortgage loan to purchase a home that is really bigger than what you can actually afford with a standard mortgage watch out.

Thanks to the exploding growth of the mortgage loan segment, especially in the interest only loan, you can now buy more house than ever on less money. No down payment requirements and a nice affordable mortgage payment. The problem however is that the borrower who uses tomorrow’s salary to buy tomorrow’s home today, will usually have the same spending habits when tomorrow’s salary is today’s salary.

There are individuals for whom the interest only loan is a tremendous benefit and is a perfect fit for the loan. The young professional with a great future, and no intention to remain in the area for more than five years, is the perfect candidate for an interest only loan. But very few of the actual applicants with interest only loans fit this description. Unfortunately, many of applicants for the interest-only loan are simply consumers who want more house for less money. The big house, with the great job, and the picket fence with 2.5 children is a great dream to have. You just need to make sure before you step onto the dream cloud that you’ve got the net beneath you, something must catch you when you fall!

In 1938, Fannie Mae was established by the US Government to promote the growth of home ownership by providing a secondary mortgage market. What is a secondary mortgage market? Well, the secondary mortgage market exists in the buying and selling of a mortgage from one lender to another. The bank, or Mortgage Company that provided you with your loan, can turn around and seek to sell your mortgage to a company such as Fannie Mae. This frees up their cash to make another mortgage loan. And the cycle of growth is expanded and sustained in this manner. The idea and concept worked, and today, Fannie Mae has helped millions of Americans achieve the dream of home ownership. Until recently, Fannie Mae was a part of the US Government, and was overseen by the Housing and Urban Development branch of that government.

Now, however, Fannie Mae is a privately held, stock ownership company that promotes the growth of the housing industry by making it possible for many low-to-middle income Americans to own homes. Investors just like you and I can purchase stock in the Fannie Mae Corporation, and not only increase our won wealth, but also help to fund the home ownership possibilities for a new generation of Americans.

In 1968, just thirty years after her government commissioned birth, Fannie Mae became a private company operating with private capital. She had outgrown her need for federal funding and supervision. That does not mean, however, that the government does not still closely work with the Fannie Mae Corporation. It does. The housing industry has continued to grow, and currently the entire mortgage market is experiencing phenomenal success. Fannie Mae’s focus, however, is still on the low to middle-income American.
Fannie Mae deals only in the secondary mortgage market, this way Fannie Mae Corporation can ensure that money for mortgages is available throughout the 50 states and that as many homeowners as possible can take advantage of home ownership.

How does Fannie Mae continue to fund the mortgages that she buys? Through the issuance of mortgage backed securities. These securities known as MBS are issued to investors. When Fannie Mae issues the MBS, she is guaranteeing the investors a return on their investment, and at the same time, providing a source of funding for issuing further mortgages. This provides the nation’s lenders with a steady stream of cash to continue to make mortgages available to the consumer.

How does all this relate to the home of your dreams? Well, stop just a moment to connect all the dots. Fannie Mae buys mortgages from your local lender. The lender receives the proceeds from that purchase, and can then offer a new mortgage to you. It’s a steady and continual circle of growth. Why? Well, Fannie Mae isn’t the only lender in the secondary market. Insurance companies, pension funds, securities dealers, and other financial institutions buy mortgages on the secondary market. Who invests in these insurance companies, pension funds and securities dealers? Where do they get their money? From taxpayers just like you. Mortgage holders just like you. Now can you see how Fannie Mae and other mortgage lenders in the secondary market, work to foster home ownership and community growth, all in one process?
The primary focus for Fannie Mae, operating under a government directive, is to provide the maximum amount of help to lenders in making mortgage loans to the low, to middle, to moderate income families across America. Fannie Mae is also involved in a nationwide effort to join with lenders and community partners to create even more home ownership possibilities.

Through this partnering, and the existence of FHA backed mortgage loans, the Fannie Mae Corporation and your local lender can offer a greater variety of loan products, and reach a much broader client base. This increases once again, the homeownership possibility for many, more Americans. Thanks to the expanding mortgage product line, the increase in real estate values, and the efforts of Fannie Mae, more Americans own their own home than ever before. Where will the future take Fannie Mae, and corporations like her? I think the Fannie Mae Corporation will continue to foster growth and the realization of the American Dream for many successful years to come.