But in a boon for borrowers in California’s expensive housing markets, the jumbo mortgage market is beginning it’s return to normal.

Two weeks ago, the average interest rate on 30-year fixed-rate jumbo mortgage dropped to 5.79%, a nearly five-year low, according to Informa Research Services. It inched up to 5.88% on Tuesday, still very attractive by historical standards. The average is down from well above 7% in late 2008.

Rates are even lower on so-called hybrid adjustable mortgages, on which the rate is fixed for, say, five years and then adjusts annually.

Banks are also relaxing slightly some of their requirements for a jumbo mortgage. That’s an encouraging sign because the market for jumbo mortgage, in contrast with the rest of the mortgage business, isn’t being propped up by the governement.

The lower rates and easier terms reflect new confidence among banks in the housing market. That’s because, by definition, jumbo mortgages are too big to be bought by Freddie Mac and Fannie Mae or to be insured by the Federal Housing Administration. Plus, the private market for mortgage-backed bonds dried up when the meltdown hit. So lenders making jumbo mortgages these days must be willing to take the risk of keeping them in their portfolios.

The maximum amounts for Freddie Mac and Fannie Mae “conforming” mortgages, and for FHA mortgages, are set by Congress. The cutoff for single-family homes was $417,000 from 2006 until February 2008, when lawmakers raised it temporarily to $729,750 in certain high-cost areas, including Los Angeles, Orange and Ventura counties. Conforming loans peak at $500,000 in Riverside and San Bernardino counties and $697,500 in San Diego County.

The increased upper limits, which have been extended until the end of this year, have created a three-tier system in expensive areas, mortgage professionals say: loans of up to $417,000, which are the easiest to obtain and carry the lowest rates; “conforming jumbos” from $417,000 to $729,750, which are somewhat harder to get and have slightly higher rates; and true a jumbo mortgage, with the toughest standards and highest rates.

In the boom years of 2005 and 2006, interest rates were typically no more than a quarter of a percentage point higher on jumbo mortgages than on conforming loans, according to Informa Research. That widened as the mortgage meltdown intensified and home prices dropped in late 2007. The spread ballooned to nearly 1.7 percentage points in early 2009 after the entire credit system froze.

But this year the rate spread has narrowed to less than a percentage point. It could shrink even more if conforming-loan rates rise as expected after the Federal Reserve wraps up a $1-trillion-plus program to assist the market for conforming loans next month.

In addition to lower rates, down-payment requirements are being relaxed in some cases. For example, to write a jumbo mortgage in coastal areas of Los Angeles and Orange counties, Wells Fargo Home Mortgage demands a 20% down payment or that percentage of equity, down from 25% last year.

The reason: High-end home prices are stabilizing in those coastal counties. But the bank still requires higher down payments in the Inland Empire and other battered housing markets such as Florida, Nevada and Arizona, where prices for jumbo-size homes don’t appear to be stabilizing, he said.

Jumbo mortgages remain much harder to get than before the credit crunch and recession. Borrowers typically must have a credit score of at least 700, compared with boom-era minimums in the 600s.

What’s more, unless their down payments are very large, borrowers must provide evidence of high income, have sizable bank accounts as a cushion against the unforeseen and occupy the houses themselves.

But there are clear signs that the jumbo mortgage market has loosened. One is an increasing availability of “stated income” loans — those that don’t require proof of income — of as much as $2 million to borrowers with at least a 40% down payment.

Also, instead of a true jumbo mortgage, some “piggyback” second loans are available again to help certain borrowers with 25% down payments pay for high-priced homes.

Of course, adjustable, stated-income and piggyback loans were big contributors to the mortgage meltdown. But such provisions are less risky if a borrower has 25% to 40% equity.

Despite the confidence in the market that such terms imply, lenders and mortgage investors are still dealing with piles of bad loans made during the boom.

Delinquencies of 60 days or more on prime jumbo mortgages that were packaged into securities jumped to 9.6% in January, up from 3.7% a year earlier, Fitch Ratings reported this month.

The jumbo delinquency rate in California jumped to 11.3% from 4.1% a year earlier.

For now, the jumbo mortgage market remains limited to the volume of loans that banks are willing and able to keep on their books. But there is hope for a return to private outside funding.

Although no jumbos have been turned into securities for at least two years, packages of delinquent jumbos have begun to be sold again to “vulture” investors, a sign that the secondary market for the loans may revive.

The ice sheet is starting to crack here and there.

Related posts:

1. Continuation of Deterioration in Jumbo Mortgage Market according to Fitch
2. Lenders easing up on jumbo mortgages
3. Jumbo Mortgage Delinquencies Soar

As serious delinquencies climbed for the 32nd consecutive month, loan performance among RMBs’s (private residential mortgage-backed securities) showed continued weakness.

Overall, jumbo mortgage RBMS at a minimum of 60 days past due grew to an astounding 9.6 percent last month, a rise from 9.2 percent the previous month, Fitch’s data shows.

The firm claims prime jumbo mortgage delinquencies accelerated in 2009, although they began to rise in mid-2007, almost tripling throughout the year. Although, Fitch does note that pre-2005 jumbo mortgage loan delinquencies still remain much lower than the most recent originations.

The five states – Florida, Virginia, California, New Jersey and New York – which all remain as the states with highest volume of prime jumbo mortgage outstanding, comprise about 2/3 of the $381b jumbo mortgage market.

Although the largest jump of the above five was Florida which although holding 6% of the market share, now retains the worst serious jumbo mortgage delinquency rate of 16.6%.

Related posts:

1. Jumbo Mortgages Rapid Deterioration Leads Moody’s to Increase Loss Projections
2. December Hike in Number of N.J. Jumbo Mortgage Defaults
3. Is the Jumbo mortgage market beginning to thaw?