Jumbo mortgage loans have played an integral role in the housing market bubble and subsequent collapse. As home prices rose beyond the limits of many people to afford them, lenders began making jumbo loans with more and more frequency. Higher interest rates on jumbo loans quickly killed the market, just as the Federal Reserve’s higher interest rate policy put an end to the housing bubble and initiated the housing crash. In July 2009, the interest rate for a typical jumbo loan stood at just under 7 percent. By July 2010, jumbo mortgage rates had plunged to 5.48 percent, the lowest since 2003 at that time.

Borrowers of jumbo loans have traditionally been the upper classes. The very reason jumbo loans are so named is because their loan amounts exceed the conforming limit set by Fannie Mae and Freddie Mac. The government-sponsored enterprises will not buy such loans, and the lenders are on their own when making them. The conforming limit varies by location, but the key implication is that the market has greater leeway to set the mortgage rates on these loans as it sees fit. With a super-low interest rate policy from the Federal Reserve, recently extended for an additional two years into mid-2013, jumbo loans have seen falling rates.

From July 2010 to August 12, 2011, 30-year jumbo mortgage rates collapsed even further, from 5.48 percent to 4.62 percent. Falling interest rates would ordinarily be stimulative to a real estate market, as they were when the Federal Reserve set the Fed Funds Target Rate at 1 percent for a solid year. In July 2010, the rich were reported to be defaulting on their mortgages faster than other income groups. With jumbo rates as low as they are, the best to hope for is a stabilization of the jumbo loan market. A new boom is not expected.

The Federal Reserve has publicly committed itself to zero interest rates for almost two additional years. With such tremendous medium-term downward pressure, interest rates will likely stay extremely low throughout the economy. Rich borrowers can take advantage of jumbo mortgage refinance opportunities if they are concerned about their situation. Jumbo mortgage refinance gets a borrower a lower fixed-rate loan, but resets their amortization schedule. The national real estate market is in shambles, and low interest rates will probably not set off another bubble. The best that jumbo borrowers can do is refinance and stay put.