Despite the recent decline in mortgage loan originations across the lending industry, Super Jumbo mortgage applications are on the rise. It’s easy to see why. After several years of strong real estate appreciation, America’s most affluent homeowners are taking profits out of their properties while values are still high by refinancing to take as much cash out of their home equity as possible. The real estate boom of the decade’s first half along with the simultaneous bull market in stocks, commodities, and other securities mean that a substantial inventory of luxury homes which began construction in the past 18 months are now being delivered to eager buyers who are well capitalized and eager to occupy their beautiful new homes. High net worth individuals who want to borrow $650,000, $1 Million, $2 Million, $10 Million or more to finance their luxury home purchase or refinance their home loan require a special type of mortgage designed specifically for the task, called a Super Jumbo mortgage. Super Jumbo mortgages have gone from being frightfully expensive, hard to obtain rarities to relatively widely available in a few short years between 2002 and 2006, although current market dynamics in 2007 are significantly reducing the ease and supply of these mortgages and the investors who finance and purchase them. Due to a variety of factors which increase the risk to lenders, no “household name” lender or financial institution is capable of financing Super Jumbo mortgages, particularly those over $2,000,000. Even the niche lenders who specialize in Super Jumbo mortgage originations must employ a variety of mitigants to handle the layered risk of Super Jumbo mortgage loans. Now available in a multitude of loan amortization types, from Adjustable Rate Mortgages to Interest Only loans to Fixed Cash Flow & Super Jumbo Option ARM mortgages, the Super Jumbo mortgage has become more versatile than ever, however qualifying for a Super Jumbo mortgage refinance or purchase money loan may become substantially more difficult if current trends continue.

So named because they far exceed the “Jumbo” loan limits which are themselves in excess of the conforming loan limits for agency loans set by Fannie Mae and Freddie Mac (which are currently $417,000 in most states except in Alaska, Hawaii, Guam and the US Virgin Islands where it is $650,000), Super Jumbo mortgages are a very distinct category of home loan. Unlike conforming loans, which are loans based on qualifying credit and income documentation for amounts below $417,000, the Federal government makes no assurance to lenders about the risk of lending to a Super Jumbo mortgage applicant. Most conforming lenders consider a loan secured by real estate with an initial balance in excess of $1,000,000 to be a Super Jumbo mortgage, while some define a Super Jumbo mortgage as a loan having a principal balance of $650,000 or more.

Super Jumbo mortgages come in all shapes and sizes, however unlike conforming mortgages, the overwhelming majority of super jumbo mortgages are Adjustable Rate Mortgages, or ARM loans. 5/1 and 7/1 ARM mortgages, which carry a fixed rate for 5 or 7 years, are considered favorites, however the fastest growing category of super jumbo mortgages are those which allow for negative amortization. Since their introduction in the 1980’s, negative amortization mortgages have been called by a variety of names, including “payment cap” and “deferred interest” mortgages. These names signify two of the loan’s most attractive characteristics for super jumbo applicants:

1. Payment Cap: No matter how the underlying interest rate of the mortgage fluctuates or adjusts over time, the minimum required payment remains the same or adjusts at a predictable, minimal rate.
2. Deferred Interest: This literally means that the borrower is able to defer the interest due in a given month until a later date in exchange for home equity, which is a highly desirable characteristic for high net worth individuals who seek to separate as much cash from the excess equity in a property as possible.

The combined effect of the payment cap and the deferred interest features of many super jumbo mortgages is the ability to make a dramatically lower payment, often half a of a normal mortgage payment, for most of the year for the first 5 to 10 years of the loan. This “minimum payment” interest deferral allows the typically high net worth super jumbo borrower to pay less interest out of pocket and pay it off in chunks by either utilizing earnings from long term capital gains or normally tax free loan proceeds from periodic refinancing to pay down the debt by permitting negative amortization. Unlike the typical conforming mortgage borrower, non-conforming super jumbo mortgage applicants typically see the opportunity to pay less interest than due in exchange for illiquid, non-performing home equity through negative amortization as a privilege and advantage.

How Does Applying for Super Jumbo Mortgage Differ from a Conventional Loan?
The application process for most super jumbo mortgages can in many ways be very complex by comparison to a conventional, conforming loan refinance for example.
1. Multiple appraisals are often required for properties with values in excess of $1.5 Million, or for unique properties with few comparable sales in their area.
2. Field Review Appraisals and Broker Price Opinions are commonly requested.
3. Loan to Value limitations are lower, meaning that less money can be borrowed as a percentage of the value of the home, or more money is required in down payment
4. Credit Score requirements are generally much stricter, although bankruptcy receive slightly better treatment
5. It takes longer than average to complete and close financing on properties with values in excess of $1.5 Million
6. It is very difficult to shop around for a super jumbo mortgage, because very few lenders can offer competitive rates and terms

However, by contrast to most conventional loans, the super jumbo mortgage applicant rarely bears the brunt of the more complex loan process, because most companies specializing in financing super jumbo mortgages are able to work with the applicant’s key service providers, such as their accountants and managers, to complete the transactions. This is in sharp distinction to most conventional banks, who rarely communicate directly with service providers without power of attorney. The highest end boutiques offering super jumbo mortgage financing will often be able to work with family offices, trustees, corporations and attorneys as well, further streamlining the process for the applicants and their family.

It is important to note that contraction in the lending industry has had a limited impact on super jumbo mortgages, in terms of tightening guidelines. In particular, Loan to Value Ratios, the measure of how much you can borrow compared to the value of your home, show signs of dramatic tightening. Credit score requirements for super jumbo applications are also more stringent than they have been in recent years. This tightening of so called “guidelines” is predicted by most to continue in the near term, and many super jumbo applicants are refinancing or acquiring undervalued property today to stay ahead of the curve and not be locked out should guidelines take a sharper turn for the worse.

Who Needs a Super Jumbo Mortgage?
The majority of super jumbo mortgage applicants describe themselves as senior management or executive, self employed or reliant on passive income from investment. Business owners and the self employed often seek to obtain cash flow option mortgages which allow them to defer interest and negatively amortize the loan, as do passive income earners and earners with substantial bonus income such as investment bankers. Doctors, in fields ranging from dentistry and psychiatry to neurology and plastic surgery, in private practice and otherwise, are also large consumers of super jumbo mortgages.

The Absence of Traditional Banks in Super Jumbo Mortgage Lending
Traditional banks are conspicuously absent or otherwise uncompetitive when it comes to super jumbo loan programs, particularly with respect to flexibility. The primary reason for this shortfall is severe risk aversion on the behalf of traditional originators, compounded by the fact that banks have a hard time dedicating resources to what amounts to a very low volume activity. While traditional banks may attempt to provide their private clients with super jumbo mortgages, they rarely have access to the breadth of investors that firms specializing in super jumbo originations do, thereby limiting their ability to deliver the best mortgage options to their high net worth clientele. Because traditional banks receive backing with the full faith of the Federal government on conforming loans and extensive investors for their smaller jumbo loans, and those mortgages make up the bulk of originations, they may invest in these traditional mortgages more freely with very little risk. Super Jumbo mortgages on the other hand would sit on their own books with no assurances, and that makes banks very nervous. When banks get nervous, rates and premiums go up to mitigate the risk. As might be imagined, the vacuum left by the absence of banks has led to the increased popularity of “private client” focused nice mortgage companies specializing in super jumbo mortgages. The specialty mortgage companies originate the majority of super jumbo mortgages in excess of $2 Million, and tend to offer significantly more aggressive loan options to their clients.

Finding a super jumbo mortgage specialist can be challenging, however in some cases it may mean the difference of hundreds of thousands of dollars of down payment money or cash left locked in home equity, so in most cases the search is worthwhile. For borrowers seeking to explore utilizing negative amortization, state their income to qualify, or otherwise utilize the more aggressive options available through a super jumbo specialist, the search may be mandatory.