In springtime, when all things hopeful and botanical bloom, there was a widespread sprouting of press announcements, particularly from the major banks, about increased dollars allocated to the business of jumbo loans.

Alas, the soil for such pronouncements has proven poor. A dearth of jumbos persists and the market appears to be wilting.

As an executive at one mortgage research company told me, earlier this year there was a flurry of activity with Bank of America and other major banks announcing jumbo loan programs, “but I haven’t heard anything since then. The market doesn’t appear to have changed much. I think some of these announcements were made to generate good press. The banks were saying, ‘Hey, we are open for business — don’t forget us,’ but they weren’t doing anything more than what they were doing before.”

Jumbo loans are basically any mortgage where the principal amount exceeds the statutory purchase limit of Fannie Mae and Freddie Mac, which has been set at $417,000 (Congress raised the upper limit in some high-cost areas to $729,750). In other words, with a conventional mortgage, Fannie Mae and Freddie Mac will buy the loan from the lender in the secondary market.

The agencies won’t purchase jumbos, which in the past were securitized and bought by private investors. That process completely closed down with the onset of the recession and the collapse of the credit markets.

If you’re BofA, or even ING Direct, which is also offering jumbo loans, then the loans have to be held in the bank’s portfolio. Hence, these lenders are being very circumspect about the loans they make since they can no longer shed the risk to other investors.

“Lenders that have stepped into this space are predominantly portfolio lenders, so they are a little more restrictive in the kinds of loans they are interested in writing,” notes Keith Gumbinger, vice president of HSH Associates Financial Publishers in Pompton Plains, N.J. “Fewer outlets are interested in lending them and when you do find them, the terms and credit restrictions are definitely tougher than they have been.”

Back in March, an Inman News story reported that BofA had cut interest rates on jumbo mortgage loans in the hopes of expanding its share of the market. Nevertheless, borrowers would still need strong credit (minimum 720 FICO score), at least a 20 percent downpayment, and assets sufficient to cover six months of payments.

In general, the big banks don’t have attractive rates on jumbos and “are very strict in regard to underwriting and property valuations,” says Dan Cutaia, president and chief operating officer of Fairway Independent Mortgage Corp. in Sun Prairie, Wis. “Unless you have a lot of equity and you are ‘gold’ to a lender, it will be difficult to find a jumbo loan, and if you do, you are going to pay a significant market premium.”

Fairway Independent Mortgage has been writing jumbo loans, which it brokers to companies like ING, but the deal has to be “absolutely golden,” with lots of equity and great credit. In short, the borrower has to be perfect.

Before the credit crisis, Fairway Independent did about 15 percent of its lending in the jumbo category; well into third-quarter 2009 the company wrote just over $2 billion in jumbos, which is less than 5 percent of its overall lending.

The good news is that prime-quality jumbo loans have a better history of defaults than conventional loans, which translates into a better risk profile on an individual loan basis. In a portfolio of loans, everything changes.

If $100 million of conventional loans came to market (which isn’t happening, but let’s fantasize), that could mean 1,000 loans of $100,000, or 100 loans at $1 million. Just a couple of loan failures in the jumbo portfolio could be more devastating than a higher number of failures in the conventional portfolio. In other words, actual losses could be higher with jumbos although the percentage of losses is lower.

The bad news with the jumbo-loan sector is that things could get worse before they get better.

“The big issue is that there are a trillion dollars of jumbo mortgages out there and these mortgage holders do not qualify for the federal government’s modification plans. Many of these people are now having financial difficulty,” says Steve Ozonian, executive chairman of Irvine, Calif.-based Sorrento Capital.

So far, the industry has not experienced a sizable destruction in jumbo-loan mortgage portfolios, as individuals who took these loans boasted good incomes at the time they signed their mortgage documents.

Since then, some of these good folk have lost their jobs.

Fortunately, when the now unemployed got their jumbo loans back in the mortgage heyday years between 2002-07, they were able to also get from the lender significant lines of credit, in some cases upward of $1 million. Ozonian believes a lot of the unemployed jumbo borrowers are using their lines of credit to continue to make mortgage payments.

The higher-end home market could experience a higher proportion of defaults and REOs at the end of this year and through 2010, says Ozonian. “The amount of jumbo-loan defaults will accelerate if we don’t allow people to modify, refi, or get out from under these homes.”

If Ozonian’s prediction comes to bear, the already narrow jumbo loan market will squeeze down even further.

The Federal Housing Administration is delaying implementation of new rules for condo approvals until Dec. 7 and will reportedly pull back from some changes that critics said would have delayed or derailed many condominium sales.

In a June 12 letter to lenders, the Department of Housing and Urban Development announced FHA would implement a new approval process for condominium projects on Oct. 1.

As originally proposed, FHA would have been limited to guaranteeing loans on no more than 30 percent of units in any one condo project, instead of the 50 percent currently allowed.

HUD also said only condos in FHA-approved projects would be eligible for the government’s mortgage insurance program, eliminating a “spot loan” approval option that’s been in place since 1996 for approving individual loans in buildings that haven’t been certified yet.

Even more problematic for lenders, HUD said all condo projects — including 40,000 developments already on the FHA approved list — would have to be re-certified every two years, meaning many projects eligible for FHA loans today would need to be reviewed before any more FHA loans could be approved in those buildings.

Lenders with direct endorsement authority from FHA would still have had the authority to certify condo projects as in compliance with FHA requirements themselves, but would risk losing their ability continue making FHA loans if too many loans in those projects went bad.

All condo projects, whether approved by FHA or direct endorsement lenders, would have had to meet minimum standards including a requirement that no more than 15 percent of units be behind on their association dues.

Lending and real estate industry groups complained about the sweeping nature of the changes. Three weeks before they were to take effect, FHA announced it was delaying implementation until Nov. 2.

Now, reporting on a meeting with FHA senior managers last week, the Mortgage Bankers Association says housing officials plan to revise some aspects of the FHA condo approval policy and push back implementation until next month.

According to the MBA, condominium projects currently on the FHA approved list will not be required to undergo recertification.

FHA will continue to back as many as half of all loans in a condo project, and up to 100 percent of units in “well established” projects with a minimum of 10 percent reserves. Half of the units in a project will still have to be sold to owner-occupants before it FHA will back any loans in a building, however.

“If what the MBA says is the deal, it’s essentially a non-event,” said Faramarz Moeen-Ziai, a mortgage banker at San Ramon, Calif.-based Bank of Commerce Mortgage.  “The big deal for us wasn’t the guideline changes — guideline changes happen all the time. It was wiping the slate clean on all previously approved condo projects” and requiring re-certification.”

FHA’s desire to get rid of the spot loan approval process was understandable — “that’s just a hassle” for the government loan insurance program to approve loans on a case-by-case basis, Moeen-Ziai said. “But throwing out all the past approvals wholesale was, I think, a move that was a lot more complicated than they’d originally anticipated.”

Although Bank of Commerce Mortgage is a direct endorsement FHA lender that relies on condo sales for 15 to 20 percent of originations, Moeen-Ziai said there was an internal debate within the company whether it wanted to take on the additional risk of certifying condo projects itself.

“By allowing the direct endorsement community to qualify these condos, they (were) basically putting the risk off to us,” he said. “Nobody wants to take on risk right now.”

The pullbacks that MBA says FHA has committed to make in the condo approval process are great news, Moeen-Ziai said — “a stay of execution for the condo market.”

A HUD spokesman confirmed that FHA has pushed back implementation of new condo approval rules to Dec. 7, but did not comment on a list of changes the MBA says FHA has committed to making.

While reverse mortgages have become a bigger part of the senior population’s financial picture, the nation’s most popular program has undergone a mandatory change that will reduce the total proceeds available to FHA-insured reverse mortgage borrowers.

The move is in response to a projected $798 million shortfall in the Federal Housing Administration’s budget for the Home Equity Conversion Mortgage in fiscal 2010. The fiscal year for the U.S. Department of Housing and Urban Development, the agency that oversees FHA, began Oct. 1.

FHA is now shouldering a greater portion of the residential loan load and its insurance component has come under greater scrutiny because of it.

In a letter to all reverse mortgage lenders dated Sept. 23, 2009, David H. Stevens, HUD’s new assistant secretary for housing and federal housing commissioner, said changes in the agency’s popular Home Equity Conversion Mortgage program were necessary “to assist with the viability of the program.”

A reverse mortgage enables senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free. But the instruments are complex and may not be a good fit for all seniors.

“In a nutshell, the commissioner explained that from its enactment, the HECM program was intended to operate without any credit subsidy,” said Peter Bell, president of the National Reverse Mortgage Lenders Association, a nonprofit trade group based in Washington, D.C.

“Since the congressional appropriations process is unlikely to provide credit subsidy, program changes are the only viable route for keeping the program operating past Sept. 30.”

The result is a 10 percent reduction in what HUD labels as the “principal limit factor” on all reverse mortgages applied for on or after Oct. 1, 2009. This factor reduces available proceeds to reverse mortgage borrowers.

Here are two examples of the new HECM maximum amounts with the principal limit factor:

71-year-old borrower in a $370,000 home with a HECM fixed-rate loan at 5.56 percent

Total cash available (after closing costs and set-asides):

* Through Sept. 30, 2009: $240,436.31
* On or after Oct. 1, 2009: $211,511.85

82-year-old borrower in a $370,000 home with an HECM fixed-rate loan at 5.56 percent

Total cash available (after closing costs and set-asides):

* Through Sept. 30, 2009: $273,908.73
* On or after Oct. 1, 2009: $241,230.75

“While the result will be an increased number of borrowers who are short funds to pay off existing liens or mortgages, it is important for the industry to keep in mind the fact that this reduction is the equivalent to less than a 1 percent increase in interest rates,” said Sarah Hulbert, chief executive officer of Senior Financial Corp., a reverse mortgage lender. “We were at that level less than a year ago.”

More than 450,000 HECMs have been made since 1989, the year FHA launched its reverse-mortgage pilot program. FHA insured approximately 112,000 HECMs in fiscal 2008, up from 107,367 HECMs in 2007 and 43,131 in 2005.

While most reverse mortgages typically have been used by older homeowners to help them “age in place,” the loans also now enable seniors to purchase a home. The HECM for purchase program allows owners over 62 years of age to make a large downpayment on a new home and then utilize the reverse mortgage as permanent financing.

For example, if a 70-year-old homebuyer wanted to purchase a $300,000 home, he or she could put approximately $123,000 down and finance the balance of $177,000, plus closing costs, with a reverse mortgage. The buyer would make no monthly payments for as long as he or she maintained the home as a principal residence.

Maximum loan fees on reverse mortgages are 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.

The reverse mortgage loan amount is based on the home value, the age of the homeowner(s), and the current interest rate. Reverse mortgages require that all prior loans and liens must be paid off so that the reverse mortgage loan is in “first place” or in first-lien position. Many times, the proceeds from the reverse mortgage can pay off the underlying loans. A senior does not have to own the home “free and clear” to obtain a reverse mortgage.

The Federal Housing Administration is delaying implementation of new rules for condo approvals until Dec. 7 and will reportedly pull back from some changes that critics said would have delayed or derailed many condominium sales.

In a June 12 letter to lenders, the Department of Housing and Urban Development announced FHA would implement a new approval process for condominium projects on Oct. 1.

As originally proposed, FHA would have been limited to guaranteeing loans on no more than 30 percent of units in any one condo project, instead of the 50 percent currently allowed.

HUD also said only condos in FHA-approved projects would be eligible for the government’s mortgage insurance program, eliminating a “spot loan” approval option that’s been in place since 1996 for approving individual loans in buildings that haven’t been certified yet.

Even more problematic for lenders, HUD said all condo projects — including 40,000 developments already on the FHA approved list — would have to be re-certified every two years, meaning many projects eligible for FHA loans today would need to be reviewed before any more FHA loans could be approved in those buildings.

Lenders with direct endorsement authority from FHA would still have had the authority to certify condo projects as in compliance with FHA requirements themselves, but would risk losing their ability continue making FHA loans if too many loans in those projects went bad.

All condo projects, whether approved by FHA or direct endorsement lenders, would have had to meet minimum standards including a requirement that no more than 15 percent of units be behind on their association dues.

Lending and real estate industry groups complained about the sweeping nature of the changes. Three weeks before they were to take effect, FHA announced it was delaying implementation until Nov. 2.With the number of bargain properties now on the local real estate market, you would think both investors and owner-occupants would be racing to take advantage of attractive deals.

While many potential homeowners — especially first-time buyers attempting to beat the Nov. 30 deadline and take advantage of the $8,000 federal tax credit — have re-entered the market and have made compelling offers to purchase Puget Sound homes, investors have been reluctant to capitalize on reverse tax-free exchanges.

Nine years ago, the federal government enhanced 1031 delayed exchanges that allow taxpayers to defer the capital gains tax on an investment property if they purchase a “replacement” investment property of equal or greater value within specific time frames.

The enhancement, Internal Revenue Procedure 2000-37, permits the title to the “replacement” property to be held by an independent third party (typically a facilitator or attorney) until the “old” property sale closes. In other words, you can buy before you sell and still defer the gain.

“I think the reason why reverse exchanges have not been terribly popular of late is that investors still need the cash to buy the property,” said Kelly Yates, an attorney who along with fellow attorney Dennis Helmick operate Exchange Facilitator Corp., which specializes in tax-deferred exchanges.

“Even though something might be an absolute deal and too good to be true, you need money to buy it. It’s difficult finding financing for exchange properties.”

This original concept of a 1031 delayed exchange, or Starker exchange, is named after T.J. Starker, an Oregon man who made a deal with Crown Zellerbach in 1967 to exchange some of his forested property for some suitable “like kind” future property. That agreement ended up in court. Starker’s battle was the basis for congressional approval of delayed exchanges.

“What we have been seeing more since the real estate market slowed down more than 18 months ago is conventional tax-free exchanges with a longer closing date,” Helmick said. “This gives the seller a longer period to execute the entire exchange.”

The clock does not start ticking on a tax-free exchange until the first property closes. Then, the seller has 45 days to identify a replacement “like-kind” property of equal or greater value and 180 days to close that second leg of the exchange.

In real estate, “like kind” can apply to a variety of situations and is quite flexible. A house may be traded for an apartment building, and vacant land traded for an office building, etc.

A house that is the owner’s primary residence cannot be traded for investment property. Nor do stocks, bonds, securities and similar equity investments qualify as “like kind.” Likewise, if you own land and build a structure on it with 1031 exchange funds, the IRS will probably not consider your investment an exchange.

One of the more complex parts of the original regulations explains that within the 45-day period following sale of the investment property, you can identify three or more parcels of property, regardless of value, that you may wish to buy for your new investment.

In other words, you can consider taking the equity from your first rental house and reinvesting it in three or more new pieces of real estate without paying taxes.

However, if the number of parcels on your list exceeds three, and their combined value is greater than 200 percent of the property sold, you are required to buy 95 percent of the total sales price of the replacement properties.

To totally defer capital gains tax, you must pass the IRS’ acid test by:

* Trading even or up in value.
* Trading even or up in equity.
* Not pocketing any cash from the first sale.
* Identifying the new (or old) property (or properties) within 45 days
of the sale (This typically means having a signed purchase and sale
agreement.)
* Closing the transaction within 180 days.

“In this environment, investors are thinking twice about reverse exchanges because they don’t want to take on the financial risk and the business risk,” Helmick said. “They are wondering where their money would be better placed and if the property they bought for cash will retain its value or appreciate.

“It’s far more likely to see individuals tying up a property for as long as possible with as little as possible.”

Q: I’m interested in a rental that describes the rent in an odd way: First, the advertisement lists the rent, then it adds “pet rent.” Is this legal? –Heidi H.

A: It’s perfectly OK for an ad to specify that if a tenant has a pet, the rent will be a certain amount more than the stated rent (unless, of course, the property is subject to local rent control, as explained below). The rent is the rent, whether the landlord chops it up into little pieces ($200 for the ceiling fan, $100 for keeping a dog, etc., for a total of “X” dollars in rent), or simply announces one flat sum. That said, a few things need to be kept in mind:

1. Charging separately and willing to omit an essential service or aspect of the rental. As most landlords know, they must offer fit and habitable premises, which includes basic things such as working plumbing, heat, weatherproofing, and so on. Most landlords would never consider this — but don’t put it past the regrettable few who might offer a “working kitchen” for a separate sum, and be willing to accept a tenant’s “No, thanks, I’ll skip the kitchen.” In virtually every rental situation, a fit and habitable rental must include a functioning kitchen sink, and the law will not allow a landlord to get out of that obligation by offering an “optional” sink, available only if the tenant pays more rent.

2. When the “pet” is alleged to be a service animal. Once the tenant utters the words “service animal,” everything changes. It’s against the law (federal and state) to charge more for a service animal (an animal specially trained to assist a person with a disability). How to confirm that the animal is indeed a “service animal” is another question entirely.

3. Misleading advertising. It’s very risky business to advertise a rental as pet-friendly, state the rent in the ad, then inform inquiring tenants that the rent will be more than the ad indicated if they have a pet. Doing so may constitute false and deceptive advertising. It’s best to state from the beginning, in all ads and conversations, that the rent will be a certain amount more if the tenant has a pet approved by the landlord.

This last caveat — that landlords must approve of the pet — is crucial. It’s dangerous to imply that any tenant who’s willing to pay the extra rent can bring any pet he chooses. Careful landlords screen those pets!

4. Rent control. Landlords subject to rent control cannot tack on “pet rent” if that would put the total rent over the legal maximum allowed by the rent control ordinance.

5. Pet deposits. Some landlords charge not only pet rent, but also a separate pet deposit. This is legal as long as the total deposit is at or below the legal maximum (assuming your state has one). However, it’s a bad idea, from a practical point of view, to segregate the deposits. Here’s why: After specifying that the pet deposit will cover damage caused by the pet, the landlord may not be able to use that money for anything else.

But what if the pet is better behaved than the owner? The landlord could end up having to refund the entire pet deposit because the pet caused no damage, even though the remaining deposit won’t cover the cost of repairing damage caused by a careless human tenant. It’s better to charge the legal maximum (or as close to that as the market will bear) and have the entire pot of money available for cleaning and repairs, no matter who soiled the carpet.

A policy that went into effect Oct. 1 could prevent more than 1 out of 5 people 62 and older from paying off their existing mortgage debt with the proceeds of a new reverse loan, experts say.

Declining home values have put a serious squeeze on the Federal Housing Administration’s reverse mortgage program for seniors 62 and older.

In a Sept. 23 letter to reverse mortgage lenders, FHA Commissioner David H. Stevens said his agency must reduce the maximum amounts that seniors can receive from reverse mortgages because of an estimated $798-million budget shortfall for the program in the coming fiscal year.

Industry sources said the move amounted to a 10% cutback for all new FHA reverse mortgage applicants starting Oct. 1. Borrowers who already have FHA reverse mortgages will not be affected.

Peter Bell, president of the National Reverse Mortgage Lenders Assn., said the policy change could prevent more than 1 out of 5 applicants from being able to pay off their existing home mortgage with the proceeds of a new reverse loan. That, in turn, could leave some homeowners in danger of falling into serious delinquency on their loans or even ending up in foreclosure. The total number of seniors affected could be in the tens of thousands, Bell said, since about 130,000 new reverse loans are projected for fiscal 2010.

Dennis Ceizyk Sr., vice president of Heartland Mortgage Inc. in Tucson, Ariz., says the FHA’s move affects two of his company’s clients — a Phoenix couple in their late 70s who no longer can afford the monthly payments on their existing mortgage. They had planned to take out a reverse mortgage yielding them $92,500 in cash on a house valued at $125,000. The $92,500 lump sum would pay off their $75,000 mortgage balance, plus closing and other transaction costs, leaving them approximately $6,000.

“They’d be able to get out from under their mortgage payments and have a little money in their pockets” while still remaining in their house, Ceizyk said. But under the FHA’s new rule, the $92,500 in initial proceeds would be reduced by $9,250 to $83,250 — not enough to pay off their loan and handle the combined closing expenses.

Under a reverse mortgage — the official FHA name is Home Equity Conversion Mortgage — the lender typically provides senior homeowners with a lump-sum payment, monthly payments or an equity credit line. The amounts paid to the owners are secured by the equity in the house and become due and payable with interest when the owners sell the property or otherwise cease using it as their residence. Borrowers are guaranteed the right to remain in their houses indefinitely, even if their debt balance exceeds the property’s value.

The FHA insures reverse mortgages made by approved lenders. In the event the loan balance approaches what the FHA determines is the maximum claim amount against the property, the lender can assign the loan to the agency and be paid the balance owed. Earlier this year, Obama administration budget officials told the FHA that, based on their projections of home price movements during fiscal 2010, the reverse mortgage program would need a subsidy of $798 million by Oct. 1 to cover a widening gap between estimated balances extended to borrowers and the property values backing them.

The gap could be filled in one of several ways, budget officials said, including congressional appropriations, a reduction in principal amounts or an increase in insurance premiums charged to borrowers. Ultimately the agency chose to limit principal amounts.

Stevens said in a statement that “we are taking steps to make certain the program remains viable for current seniors as well as the next wave of baby boomers who may be considering it as an option.”

Reverse mortgages increasingly have been used by seniors as a financial planning tool. Homeowners are often able to extinguish their mortgage debt — stop paying out hundreds or thousands of dollars a month — and convert their home equity into a cash resource or income stream. This is especially important for seniors who are on financial tightropes.

Though the new 10% cutback may make things tougher for them during the coming year, Bell and others are working on plans to reduce its effect. One idea, he said, is to allow seniors’ current lenders to agree to accept less than a full payoff, given the diminished reverse mortgage proceeds available. The unpaid balances could then be recast as junior liens secured by the property, repayable over an agreed-upon term of years, or in a lump sum with interest when the house is sold.