Expansion of Jumbo loans may be on the horizon

The WSJ published this article on Monday in which they report that investors’ appetite for risk is growing.  This is evident in the fact that many Wall Street firms are re-introducing complicated debt instruments to the marketplace.  Although this may sound like a risky proposition it may be a good sign for those stuck with mortgages greater than $417,000 who are unable to refinance.  This is because over the course of the past couple years jumbo financing (loans > $417,000) has been extremely limited as investors were not willing to buy mortgage-backed bonds that were not secured by the government (Fannie Mae, Freddie Mac, and Ginnie Mae).   As a result, lenders offering jumbo loans were usually banks and savings & loans institutions who kept the loans on their own books. Due to their risk exposure underwriting has been restrictive and interest rates for these loans have been substantially higher.

Now that Wall Street is beginning to see expansion in risk taking again this may result in lenders packaging up jumbo mortgages and selling them to investors.  If this happens I expect some more competition in the jumbo space which means the terms on these loans should improve and the underwriting requirements should ease from the current conservative levels.