It has become cheaper to buy a huge McMansion at the shore than a modest seaside bungalow.

At least, it's cheaper to borrow the money for the largest shore houses. There are plenty of theories on why interest rates for so-called "jumbo mortgages," or those for more than $417,000, have dropped, and apparently for the first time, below the rate for conventional fixed-rate "conforming mortgages" of less than $417,000.

One of the leading theories is the big banks have a lot of cash and want to get back into a housing market they abandoned during the recession.

"They have money right now and they're feeling good about the market and better about the economy. They're trying to attract that wealthy client," said Kevin Redmond, president of the Ocean City Board of Realtors and owner of New Jersey Realty in Ocean City.

Jumbo mortgages are traditionally at least half a percentage point higher than a conventional mortgage. Redmond said the average interest rate for a conforming mortgage is 4.625 percent right now but the jumbo rate is 4.25 percent for loans of $417,000 to $1.5 million and 4.375 percent for larger loans.

The conforming rate is somewhat controlled by those backing it, including government-sponsored programs like Fannie Mae and Freddie Mac. Jumbo mortgages have no such backing and are set by individual banks that back the loans themselves or sell them to secondary markets. Redmond said the fact that banks are investing in the real estate market is good all around.

"The bigger money comes in and that will be followed by the smaller money," Redmond said.

Matthew Iannone, a Sea Isle City real estate agent since 1973 and president of the Cape May County Association of Realtors, has never seen the jumbo rate fall below the conforming rate. He said a lot of buyers traditionally keep the mortgage at $417,000 or less to avoid the higher rates and increased paperwork caused by the government not backing up the larger loans. He said the lower rates could encourage buyers to purchase a larger property than they were shopping for.

"Jumbo loans are private investors. They're jumping back into the lending frenzy because it's a good source of income for them," Iannone said.

This is good for the market in general for several reasons. Iannone said any time rates come down "it helps somebody." It also means there is a greater flow of money and this can only help the housing market. He said it also shows the economy is improving.

John Linnington, sales manager of the Title Company of New Jersey, said it is really the "too big to fail banks" getting back into the housing market. They are flush with cash and want to make low-risk loans.

Bill Bezaire, of Caldwell Banker Real Estate in Cape May, said the banks are doing "portfolio lending," meaning they are backing the jumbo loans instead of selling them on secondary markets. Bezaire said the banks are picking "cream of the crop, Cape May-type buyers," and the qualifications to get them are tough.

"You almost have to give away your first born to get a mortgage. The process is not Fannie Mae and Freddie Mac backed and they want to know they are dealing with top-shelf borrowers. They're charging less because they know there's

not going to be a problem," said Bezaire.

The jumbos have cheaper interest rates on average but some banks are bucking the trend. Some smaller community banks didn't have bad loans during the recession because they know their borrowers personally and didn't lend money to those who couldn't pay it back.

Sturdy Savings Bank CEO Gerald Reeves said the big banks reduced lending during the recession while his community bank, which primary lends money in Cape May County, has been "steadily lending the last six years."

Sturdy Savings continues to have higher rates for jumbo mortgages. It has a tier system and meets once a week to make adjustments.

"There's a slightly higher credit risk for larger loans. We're being somewhat cautious," said Reeves.

During the recession, Reeves said, the big banks were charging more the larger the loan. He said they couldn't find buyers in the secondary market but this was not a problem for Sturdy Savings because they held their own loans.

"They got conservative during the recession. Whatever was making the big banks cautious, they lost that caution and they're aggressively trying to grow their loan portfolios. They have lots of money to lend. The market has resumed and there's a lot of money in the system," Reeves said.

It remains unclear how it will play out in the coming months in the shore real estate market. Reeves, a banker for 33 years, said he has seen a lot of "crazy cycles" over the years. Right now, it's cheaper to borrow for a McMansion than a modest seaside bungalow.

Contact Richard Degener: