Big Loans Could Get Cheaper; Supporters Say The Proposal Would Help Jumbo Borrowers And Stabilize The Housing Market

A component of the government's tentative economic stimulus package announced Thursday would give an immediate lift to buyers and sellers in higher-priced housing markets and would provide nearly a year of cheaper loans for those borrowers buying or refinancing higher-cost homes.

Leaders of the House of Representatives and the White House agreed that the size of loans that can be purchased by government-sponsored mortgage buyers Fannie Mae and Freddie Mac should be increased sharply for a year from the current cutoff of $417,000.

The plan also would nearly double the size of loans insurable by the Federal Housing Administration, from $367,000 to $729,750. The increase in loan limits would not only improve liquidity in the mortgage marketplace, but also boost homebuyers' confidence levels, resulting in increased sales and economic activity.

Currently, any loans above $417,000 are considered "jumbo" mortgages. In recent months, they have become harder to obtain because skittish private investors have become reluctant to buy them.

Interest rates on jumbo loans were running about 6.5% this week -- 1 percentage point higher than rates on the so-called conforming loans that Fannie and Freddie could buy. Someone who wanted to borrow $500,000 would save about $330 a month, or $3,960 a year, if such a loan were considered conforming and thus had a lower rate.

"It's the single most effective step they could take to stabilize the housing and mortgage market," said Rick Simon, a spokesman for Calabasas-based Countrywide Financial Corp., the nation's largest home lender, which had led the lobbying to raise the loan limits.

The precise increase on the "conforming" ceiling was still being debated late Thursday. House Republicans said they had agreed to temporarily raise loan limits for Fannie Mae and Freddie Mac to $625,500 while Democrats said the deal would boost limits to $729,750.

Either way, the increased limit on loans eligible to be bought by Fannie Mae and Freddie Mac would be temporary, expiring Dec. 31, 2008.

"This is a very positive development for homeowners," said Susan DeMars, executive director of the California Mortgage Bankers Assn. The California Assn. of Mortgage Brokers said the plan would "increase much-needed liquidity in today's struggling housing market, giving homeowners and home buyers access to safe, sustainable loans."

The National Association of Realtors® estimated that lifting the conforming loan limit to $625,000 would lower interest payments for consumers who get new "conforming-jumbo" loans, reduce the supply of homes on the market by one to one-and-one-half months, strengthen home prices by two to three percentage points, and increase economic activity by $42 billion. An additional NAR report shows that increasing conforming loan limits could help reduce foreclosures by 140,000 to 210,000 and result in an additional 348,000 home sales.

"This is the quickest way to help the hurting housing market," said Gaylord. "As the potential for an economic recession increases and the fragile housing market continues to teeter, raising loan limits and reforming FHA would immediately impact the marketplace without the need for any new, complex federal programs or tax dollars. We strongly urge Congress to take these actions, in any stimulus plan, to stabilize the housing market and protect homeowners

Does the deal address the mortgage crisis?

Yes. The package would temporarily increase the size of mortgage loans - known as the conforming loan limit - that Fannie Mae and Freddie Mac can purchase: from the current $417,000 to a maximum of $729,750. It would also permanently raise the cap on Federal Housing Administration mortgage loans from $367,000 up to $729,750. Plus you would get all the generous feature of conforming loans, such as investor loans, stated income, interest only, cash-out, 100% LTV purchases and the rest of the goodies.

Why raise the conforming loan limits?

Supporters say raising the loan limits will deliver lower interest rates to a very large number of home buyers.

Right now, mortgages for more than $417, 000 carry higher interest rates than mortgages below that amount. That's because Fannie Mae and Freddie Mac are not allowed to back loans above that cutoff.

Higher loan limits will make many more homeowners eligible for lower rates, which could translate to savings of hundreds of dollars each month for those in high-cost areas of the country.

Sounds great, what's the problem?

The problem is that there will be an immediate demand for thousands of Jumbo refinances. Most banks and major lenders have shrunk down to a skeleton staff to try to save money and help make up for the huge losses they took on the collapse of the sub-prime market. Typical closing times gone from 15 to 30 days over the past year and I'm afraid this new influx of business will push turn-around time to 60+ days-plenty of time for the market to make pricing supply/demand adjustments.

At Katz Mortgage Team, we have already started accepting pre-applications for this new product change. It cost nothing to do. You simply fill out a loan application and pick a target rate based on the current mkt. That way the very day the president signs off, we can lock you in and put your loan in process, ahead of several thousand new loan applicants. You will be assured to get the pricing you want and fast turn around.

Stephen Katz

Katz Mortgage Team

866-742-8400

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