The Washington Post 

Looking for a mortgage that exceeds $729,750?

Not long ago, you would have been charged about 8 percent interest on a loan that large — if you could find a lender willing to grant you one.

Now, rates on these “jumbo” loans are much more affordable, having settled in the low 6 percent range, on average, for the past few weeks. But taking advantage of the lower rates remains tough. “Availability is still an issue, and the bar is higher in terms of down-payment requirements and credit scores,” said Greg McBride, a senior financial analyst at Bankrate.com, a personal finance Web site.

After the mortgage market began unraveling in late 2007, rattled investors stopped buying jumbos. Instead, they turned to loans that met the requirements of mortgage financers Fannie Mae and Freddie Mac. At the time, the two companies did not buy loans that exceeded $417,000. Rates on loans larger than that shot up. And borrowers in pricey areas like Washington got shut out of the housing market or lost a chance to refinance.

To help lower borrowing costs, the federal government temporarily raised the limit for loans Fannie Mae and Freddie Mac could buy. Now the ceiling is $729,750 on single-family homes in some of the nation’s most expensive counties, including many in the Washington region. The higher ceiling, due to expire Dec. 31, also applies to mortgages backed by the Federal Housing Administration.

In areas where the $729,750 ceiling applies, there is now a three-tiered mortgage market. It is structured so that the size of the loan is a main factor in determining its rate.

On a 30-year, fixed-rate loan up to $417,000, the average rate this week was 5.44 percent, according to the research firm HSH Associates. The next best rates apply to loans from $417,000 to $729,750, which averaged 5.72 percent this week. Loans larger than that get hit with the highest rates, which averaged 6.37 percent for the week.

To avoid the highest rates, some borrowers are trying to stay beneath the $729,750 ceiling by taking out two loans while still making a down payment: one loan for $729,750 and another for the balance, said Kerry White, a loan officer at Prosperity Mortgage, a joint venture of Long & Foster and Wells Fargo.

These “piggyback” mortgages are difficult to arrange. But for those who can get them, they are generally a cheaper alternative than taking out a single jumbo loan because they do not expose borrowers to the same stringent credit-score, down-payment and savings requirements, White said. At Wells Fargo, for instance, a borrower willing to make a 20 percent down payment on a jumbo loan must also prove that he or she has enough savings to cover at least 40 percent of the loan amount, not including whatever is stashed away in retirement accounts, White said.

But getting a second loan is not as easy as it once was. In the past, when home prices were climbing, piggybacks enabled borrowers to avoid down payments by using two loans to cover the entire cost of a home. Many of these loans went bad when the housing market soured. Most lenders now demand a down payment and shy away from making second loans.

White managed to help a Washington area lawyer secure a second mortgage recently to help pay for a $2.5 million house. “But he got it only because he was putting 30 percent down,” she said. “The small bank that made the second loan was comfortable with that.”

These standards are not out of line with current norms, said Bob Walters, chief economist at the online mortgage firm Quicken Loans.

“Borrowers are going to be putting down 20 percent at the very least on a jumbo, and once [the loan amount] gets past $1.5 million, the down-payment requirements go to 30 percent and even 40 percent,” Walters said. “The more you’re borrowing, the more skin in the game you have to have.”

The National Association of Realtors said these requirements have stalled the sales of high-priced homes and hampered the housing market’s recovery. The supply of expensive homes is growing, adding to an already bloated housing market, the group said.

Meanwhile, the default rates among jumbo borrowers have been rising because those homeowners lack refinancing opportunities, the association said.

Against that backdrop, Bank of America sees opportunity.

In January, the company started offering jumbos with rates in the high 5 percent range for borrowers who pay one point, a fee equal to 1 percent of the loan that helps lower the rate charged. Borrowers who take out jumbos that are fixed for five years and then adjust every year thereafter are priced in the low 5 percent range. Those jumbo loans are limited to $1.5 million, and Bank of America plans to raise the amount to $2 million in the next few weeks.

“All of us have heard the same complaint: Jumbo buyers with good incomes and strong credit deserve better rates,” Vijay Lala, a mortgage-product executive for the bank, said at a recent National Association of Realtors conference.

But anyone who takes out a loan for more than $1 million must have enough cash in reserve to cover at least a year’s worth of principal and interest payments, Lala said. Borrowers must also show proof of income and assets to qualify.

Consumers who can meet these criteria have performed well historically, which is why Bank of America is willing to take a chance on them, Lala said.

Bank of America and most lenders that offer jumbos these days are holding on to them instead of selling them to investors, as they did about two years ago. That’s because few investors are willing to buy them, said Keith Gumbinger, a vice president at the research firm HSH.

By keeping these loans in their own portfolios, lenders have discretion on what standards they want to impose on borrowers, so it pays to shop around, Gumbinger said. “Lenders can have very different ideas for what they find to be acceptable.”

Don’t limit your search to big banks, either, said Guy Cecala, publisher of Inside Mortgage Finance. Take a look at community banks.

“Generally, they would like to make a loan locally to someone they know,” Cecala said. “You should milk any banking relationships you’ve got. People who keep their life savings at a community bank have more leverage than somebody walking off the street.”