Capitol Hill's most influential legislator on housing issues says Wall Street and the mortgage lending industry are needlessly overpricing "jumbo" loans designed to help borrowers in areas with high home costs.

Barney Frank, chairman of the House Financial Services committee and chief author of legislation that raised the maximum mortgage limits of Fannie Mae, Freddie Mac and FHA to $729,750 through the end of the year, plans to haul officials of major mortgage firms before Congress next week to explain why interest rates and fees for new jumbo loans are so high.

"I am disappointed," said Frank. "We fought very hard to raise the loan limits for Fannie and Freddie and there have been a lot of problems in implementation.

As part of the federal economic stimulus law, higher limit jumbo loans have been authorized since April 1. But only a relatively small number have been funded. That has prompted criticism from groups such as the National Association of Realtors, who expected to see sales stimulated in California and along the East Coast by the more generous mortgage ceilings.

For years, jumbo rates have averaged about a half a point higher than those on conforming, conventional loans. But after the credit implosion last August, jumbos have been priced anywhere from one and a half points to two points and higher than conforming.

In a 6 percent conforming market, jumbos might cost seven percent or more. When extra "delivery" and "declining market" fees are tacked on by large investors and lenders, jumbos sometimes have carried effective rates of 8 percent.

Congressman Frank thinks those rates are scaring away potential buyers and refinancers. Mortgage industry experts say investors are simply being careful - requiring higher returns for financing big loans in areas where they believe property values could fall further.

Frank rejected the claims of investor caution. "There is a chain of people blaming each other," he said, "and we're going to call in everybody and find out why."

Meanwhile, both Fannie Mae and Freddie Mac say they're working on the problem. Fannie announced last week that it would soon begin pricing jumbos more affordably -- even buying them around conventional pricing levels.

Freddie Mac announced a $15 billion commitment to purchase more jumbos at lower prices through three major banks - Wells Fargo, J.P. Morgan Chase and Citigroup.

How can you take advantage of the promise of lower jumbo rates? Contact your mortgage broker -- or any of the three banks -- and find out whether they're doing what they promised.

If jumbo rates are still far above conventional -- they're not.

Published: May 12, 2008

Use of this article without permission is a violation of federal copyright laws.

Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.