Rising home inventories put downward pressure on home prices, and the reduced availability of jumbo loans appears to have worked its way through much of the market, NAR said.  In addition, many homeowners are unable to refinance their existing jumbo loans to take advantage of lower rates, which has contributed to a rise in default rates and crimped consumer spending. Many jumbo mortgage holders could save $6,000 to $15,000 in annual interest costs if they were able to refinance, the report said.

The secondary market for jumbo mortgages fell apart in late 2007, when investors stopped buying bad credit mortgage securities not backed by Fannie Mae, Freddie Mac or the FHA.  Because mortgage lenders must now hold such loans as investments, they’ve instituted stricter underwriting standards and are charging higher interest rates.

While bad credit mortgage rates on conforming mortgage rates that are eligible for purchase by Fannie and Freddie are near historic lows, the “spread” between jumbo and conforming mortgage rates has increased to between 150 and 200 basis points. Before the credit crunch, rates on jumbo mortgages were 20 to 50 basis points above rates on conforming home loans. Although jumbo mortgage loans are often thought of as primarily for the wealthy, they are also a necessity for many middle-class families in high-cost coastal states, NAR said. Jumbo loans (those greater than $417,000) accounted for 30% of the dollar volume of mortgages originated in 2007. The share was much higher in California (63%), New York (51%), and Florida (29%).

Congress last year raised the conforming loan limit in high-cost markets to up to $729,750. But underwriting standards on conforming and FHA mortgages remain stricter than those for conforming mortgages under the $417,000 conforming loan limit that remains in place for “normal” housing markets. Borrowers generally need FICO scores of at least 700 to obtain fixed-rate super-conforming mortgages, and to provide at least a 10 % down payment. Freddie Mac is requiring down payments of at least 20 % for loans above $625,500 (see story).

According to NAR, 60% of recent home financing that used jumbo mortgage loans made down payments of at least 20%. In California, more than 75% of recent home purchase loans who used jumbo mortgages put more than 20 percent down.  “Such high down-payment requirements have no doubt deterred buyers, leading to higher inventories, falling home prices, and rising defaults,” NAR said.