June 26 (Bloomberg) -- JPMorgan Chase & Co. and Citigroup Inc. are expanding in “jumbo” mortgages used to buy the most expensive homes, helping revive a market that shriveled amid a three-year jump in homeowner defaults.

JPMorgan resumed buying new jumbo loans made by other lenders this month, after halting purchases in March, spokesman Tom Kelly said. Borrowers must have checking accounts with the bank, he said. Citigroup is again offering the loans through independent mortgage brokers, spokesman Mark Rodgers said.

The two New York-based banks are signaling new interest in a market hobbled since 2007, when record-breaking defaults on home loans caused investors to flee securities backed by mortgages. With the recession sapping demand for new consumer and corporate loans, lenders are competing harder for creditworthy customers, said Harry Davis, banking professor at Appalachian State University in Boone, North Carolina.

“They have surely across the board raised lending standards, and there aren’t a lot of good borrowers standing in the lobby,” Davis said in an interview.

Jumbo loans exceed limits set for government-controlled mortgage companies Fannie Mae and Freddie Mac on loans they can buy or guarantee. Those limits range from $417,000 to $729,750 in the most expensive locales.

New Lending

New jumbo lending, which includes refinancing as well as debt for home buyers, totaled $348 billion in 2007, before dropping to $98 billion last year as mortgage companies tightened standards, according to newsletter Inside Mortgage Finance. Jumbo lending slowed in the fourth quarter to $11 billion, or 4 percent of the mortgage market, the lowest quarterly amount since Inside Mortgage Finance started tracking that data in 1990.

The bust drove specialists including Thornburg Mortgage Inc. into bankruptcy and cut sales in higher-priced markets including California, according to MDA DataQuick, a unit of Vancouver-based MacDonald Dettwiler and Associates.

While competition for jumbo loans is increasing, lenders aren’t accepting riskier debt, said David Adamo, chief executive officer of Luxury Mortgage Corp. in Stamford, Connecticut. Some banks won’t let would-be borrowers count bonuses as income to help them qualify, he said.

JPMorgan declined to say how many more loans it is seeking. Citigroup’s Rodgers didn’t have an immediate comment on the size of its program. The bank last week started making jumbo loans through “a limited number of high-quality brokers,” he said.

Bank of America

Bank of America Corp. was the largest jumbo lender in the first quarter, with almost $9 billion in new loans, followed by Citigroup, according to newsletter National Mortgage News. JPMorgan ranked sixth. San Francisco-based Wells Fargo & Co. was the top overall mortgage originator, followed by Bank of America, JPMorgan and Citigroup, the newsletter said.

Barbara Desoer, head of Bank of America’s mortgage unit, said in a March interview the bank was seeking to make more jumbo mortgages, offering “extremely competitive” rates to consumers. The Charlotte, North Carolina-based bank “has balance-sheet capacity and we’ve allocated it to jumbos given our presence in some of the states and regions where that’s important,” she said. “We’re very much open for business.”

Bank of America doesn’t now make jumbo mortgages through brokers or so-called correspondent lenders, only its “retail” channel, though that’s “under regular evaluation,” said spokesman Rick Simon. Wells Fargo also limits jumbo lending to loans it makes directly, said spokesman Kevin Waetke.

Market Collapse

The collapse of the market for home-loan securities without government support forced lenders to hold on to most of the jumbo mortgages they made. Issuance of bonds backed by new prime-jumbo, subprime or Alt-A loans plummeted 98 percent last year to $11.1 billion, according to Inside Mortgage Finance.

More than 7 percent of prime-jumbo loans backing securities sold in 2006 and 2007 were at least 90 days late, Standard & Poor’s said yesterday.

Interest rates on typical 30-year fixed-rate jumbo loans are about 1.03 percentage points higher than conventional loans whose rates are being held down by the Federal Reserve’s mortgage-bond purchases, averaging 6.54 percent as of early yesterday, according to Bankrate.com. The difference averaged 0.29 percentage point in the eight years through 2006, then soared to the highest on record at 1.84 points in January.

Rising Demand

“I’m actually starting to see a lot of community banks asking for jumbo loans,” Grant Stern, owner of brokerage Morningside Mortgage Corp. in Bay Harbor Island, Florida, said in an interview.

Still, underwriting standards remain “pretty ridiculous,” he said. One client was rejected even though his assets excluding the house about equaled his mortgage. The borrower’s income was deemed too low, Stern said.

Asked about what kind of person can now qualify for a jumbo mortgage, Melissa Cohn, president of the Manhattan Mortgage Co. loan brokerage, said, “Someone who is God.”

“Basically they will want you to qualify with no more than, say, 40 percent of your income being used for all of your debt service,” she told Bloomberg Television on June 10. Criteria may also include 25 percent down payments, good credit history and “good liquidity in the bank after closing.”

JPMorgan and Citigroup are expanding in the part of the mortgage business where loans are made through third parties, a type of lending blamed by regulators, lawmakers and bankers as among the biggest causes of soaring foreclosures.

‘Biggest Mistake’

“My biggest mistake, probably of my whole career, was not closing down our mortgage-broker business sooner,” JPMorgan CEO Jamie Dimon said in a March speech. The bank quit funding home loans through brokers in January.

In October, Citigroup cut off all but 1,000 of the 9,500 brokers in its network for selling the bank loans of poor quality, or in insufficient volume to be profitable.

This week, the bank temporarily halted mortgage purchases from correspondents after a review found that some appraisals and income-verification documents were missing. It stopped accepting loans on June 24 and will restart July 6, according to a June 22 notice. The company said it will use the time to change procedures and fix the omissions.

JPMorgan’s new correspondent program reflects an effort to strengthen its customer base because “the checking account is such an important part of the relationship,” said Kelly, the spokesman. “It’s an account you literally use every day.”

During a February investor presentation, Charlie Scharf, the bank’s head of retail financial services, said consumers with its bank accounts more often stayed current on mortgages than those without. For example, the share of the bank’s Arizona prime loans being deemed uncollectible was 2.6 percent for borrowers without a “deposit relationship,” versus 0.7 percent for customers, according to slides he presented.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: June 26, 2009 16:04 EDT