Before the financial crisis, borrowers who needed a jumbo loan – ones that are too large to be backed by a government sponsored enterprise – but didn't want to pay the higher interest rates or higher down payments, turned instead to two conforming loans. The practice, called "piggybacking," was credited with part of the financial collapse in 2008. But, one of the reasons piggybacking seemed so appealing before the crisis was the higher spread between conforming loans and jumbo loans. Now that the gap is shrinking, the Wall Street Journal explains that more borrowers may be turning to the jumbo loans that were previously ignored.
The Journal quoted Carver Financial Services president Randy Carver, who explained that since interest rates are no longer more appealing for conforming loans, other costs – like conforming costs and time spent finding a lender – are beginning to encourage borrowers to turn back to a single jumbo loan. In addition, some lenders don't allow borrowers to take on two mortgages.
For lenders, this could require additional risk management tools. Since jumbo loans are too large to be backed by a GSE, looking into the qualifications of borrowers is more vital than conforming loans. And, since the historically low interest rates are unlikely to go anywhere – the Fed has stated that efforts to keep rates down will continue until employment has improved – this turn to jumbo loans, instead of two loans, may also stick around. To prepare, having loan processing software in place can help financial institutions and lenders profit off these loans.