Jack M. Guttentag The Mortgage Professor

During the period of May 4, 2007 to Nov. 7, 2008, the spread in wholesale interest rates between a $417,000 loan eligible for purchase by Fannie Mae and Freddie Mac and an ineligible $418,000 loan increased from 0.28 percent to 2.97 percent.

Loans eligible for purchase by the agencies are called "conforming loans." Loans larger than $417,000 are called "jumbos," and borrowers who need one today face a perplexing array of choices.

Giant-Size Rules

Until July 1, 2008, the agencies couldn't purchase jumbos. However, as the private secondary market in jumbos deteriorated in late 2007 and early 2008, Congress passed the Economic Stimulus Act of 2008 in February.

Among other things, that bill authorized the agencies to purchase jumbos in high-cost areas. The allowable size of jumbos on single-family properties can range up to $729,750, depending on house prices in the county in which the property is located. This authorization for the purchase of jumbos lapses after Dec. 31, 2008.

To complicate matters further, in July, the Housing and Economic Recovery Act of 2008 set permanent jumbo size limits that will kick in beginning January 2009, provided the current limits are not extended. The permanent limits are similar but lower, with a maximum of $625,500. (You can find the jumbo size limits for the balance of 2008 here. Counties in which jumbos aren't authorized don't appear.)

Pricing a Jumbo

Contrary to what Congress evidently expected, conforming jumbos are not priced the same as conforming loans of $417,000 or less. On Nov. 7, 2008, when the wholesale rate on a conforming $417,000 loan was 5.76 percent, the rate on a conforming $418,000 loan was 6.33 percent. This was far better than the 8.73 percent on a non-conforming $418,000 loan, but why is there any difference at all?

Part of the reason is that the agencies are charging more on jumbos, presumably because they're more costly to process, more risky, or both. A second reason is that the secondary market is treating jumbos as a special category of loan that may not be marketable through the efficient TBA ("to be announced") pooling process.

A TBA pool is the collateral for a mortgage-backed security that is priced and traded before the security is issued. Jumbos can only comprise 10 percent of the mortgages in a TBA pool, which allegedly lowers the price investors will pay for it. This treatment of jumbos might be temporary.

Categorizing Your Loan

Given the current state of the market, borrowers today should place themselves in one of three groups.

If you need a loan of less than $417,000, using a mortgage bank or mortgage broker will assure that your loan will end up with one of the agencies, and that your loan provider will have access to the best prices available. You remain vulnerable to excessive markups, however, which is why I recommend Upfront Mortgage Brokers (UMBs) if you need handholding, and Upfront Mortgage Lenders (UMLs) if you want to control the process on the Internet.

If you can't meet the agencies' credit, documentation, and other requirements, you may still qualify for an FHA loan. Some of the UMBs and UMLs offer FHAs, and other FHA lenders can be found here.

Finally, if you need a loan that's larger than the agencies' current jumbo limit in the county in which a property is located, the best option is to shop depository lenders -- commercial banks, savings and loan associations, and credit unions. This can be quite a challenge, however, because of the wide disparity in prices among the institutions.

Evidence of Turmoil

On Nov 12, I shopped for an $800,000, 30-year fixed-rate mortgage on Mortgage Marvel, an online site that I reviewed a month or so ago.

The mortgage companies on the site quoted rates of 8.125 percent to 8.375 percent. The credit unions and banks, in contrast, quoted rates ranging from 5.875 percent to 7.875 percent.

I've never before seen rate differences on the same transaction this large. They no doubt reflect wide differences in lender access to funding, which is symptomatic of a market in turmoil.

Final Thoughts on Jumbo Loans

If you qualify for a conforming jumbo, meaning that you need a loan larger than $417,000 but no larger than the jumbo limit for the county in which a property is located, you'd probably do best following the procedure described above for a $417,000 conforming loan.

Since you'll be paying a significant premium over the price of a $417,000 conforming loan, however, you might also check out depository sources. You also need to be mindful that the current jumbo size limits are good only to year-end unless Congress extends them. Otherwise, they'll be replaced by the lower permanent limits.