The Federal Housing Authority (FHA), Fannie Mae (FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation - FHLMC) have set a new loan limit for Montgomery County, Maryland of $729,750. This came about as part of the Economic Stimulus Package of 2008.
So what does this mean to you? If you're looking to buy a home and you want a loan for $729,750 or less to purchase that home; you're going to get a better deal than you would have up until now. Lenders offer "conforming" and "non-conforming" loans. Conforming loans are easier to sell in the Secondary Mortgage Market than non-conforming loans. That's why conforming loans offer lower interest rates than non-conforming loans. Also, if you're looking to refinance your current conforming mortgage (maybe you've got an ARM that's about to come due?); this new limit should help you, too.
Freddie Mac (FHLMC) and Fannie Mae (FNMA) are the big players in the Secondary Mortgage Market. What they do is they buy loans from lenders and then "package" them into "pools" of mortgages. They sell these "pools" as securities on Wall Street. Think of it like this (a simplified example):
You know that most people pay their mortgages on time, since their home is really important to them. If you loaned a new homeowner your own money in the form of a "mortgage" loan; you could get about 6% interest income on your money. Not only that, your investment is pretty secure and safe; considering that people usually pay their mortgage on time AND homes generally don't go down in value significantly over time. Your interest is "secured" by a lien on the home, AND the new homeowner put 20% down so the value of the home would need to go down 20% for you not to be able to collect your money, should they default on the loan. Seems like a great deal, right?
So why don't more people do that?
The Secondary Mortgage Market does just that, but takes it one step further. They pool together mortgage loans in packages, and sell them as securities on Wall Street. You could invest in one of these relatively low risk "Mortgage-Backed Securities" or MBSs and you'd think you could expect somewhere near the 6% the homeowners are paying minus some fees for the Secondary Mortgage Market player's efforts. In all actuality, the returns on MSBs are not that high; and you like anything, you can get a better return on your investment by taking more risk by buying riskier stocks. However, MSBs are very popular; and many people have a chunk of their retirement monies invested in them. Insurance Companies often invest in MSBs.
What's going on with Mortgage-Backed Securities (MSBs) now? They are still popular, and pools of traditional 30-yr fixed loans with 80% Loan-to-Value rates are still decent and pretty low risk investments. However, since in many areas, home prices have dropped and many loans were made for more than 80% of the price of the home; many people have been defaulting on their mortgage loans. For example, if you bought a home for $100,000, and you took out a loan package totalling $95,000; your home would only have to drop $5,000 (5%) in market value and you would owe the lender more money for your home than it was worth. You might sell your home as a "Short Sale". You'd sell their home for less than 95% of what you bought it for, and then you ask the lender to accept less than the amount you owe them for the loan.
What happens when you can't sell your home at "Short Sale"? That's when the lender might foreclose on the loan. After a lot of legal process, the home is sold by the lender. The lender collects their expenses for the sale and hopes to re-coup most of the amount of principal that was due to them. Unfortunately, they usually do not actually re-coup the full amount owed to them; and the loan yield a loss to the lender.
Obviously, if you owned a MBS that consisted of these riskier types of loans; you might expect that in this market, the MBS is losing money. This is a very over-simplified explanation of our current mortgage crisis. There are many other factors involved in the mortgage crisis, such as ARM loans which are coming due and a whole world of factors which even the "experts" don't understand. However, please don't let the media make you think that the sky is falling. According to the Mortgage Bankers Association, "the delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 5.82 percent of all loans outstanding in the fourth quarter of 2007." The fact is, most Americans still pay their mortgages on time. Most of us are NOT in default on our mortgages.
Good home loans are still available, and interest rates on these loans are still hovering around 6% --- historically a very good rate!
For more information or to discuss, please post your comments below or visit the websites listed below. As always, feel free to email me at Colleen.Barlow@LongandFoster.com
Colleen Barlow's Potomac, MD Real Estate Website: http://www.ColleenBarlow.net
Mortgage Bankers Association: http://www.mbaa.org/
FHA: http://www.fha.gov
Fannie Mae: http://www.fanniemae.com/
Freddie Mac: http://www.freddiemac.com/
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