I see a glimmer of hope in this economic stimulus package that is on the verge of being passed. It brings about the best news for the housing market in some time. In addition to the tax refunds that everyone seems to be focusing on, the increase in the conforming loan limits have been overlooked as a small matter. It most certainly is not. Currently, you have a secondary market with very little demand for jumbo loans. Except for the portfolio lenders, most companies who write your loan turn around and sell it on the secondary market. With less demand, and a large supply of people trying to get loans, these lenders can be, and must be, very picky, taking only the best loans submitted. Not only that, they must sell them at higher rates in order for the secondary market to buy them (the higher the rates, the better the return for the investors on the secondary market).
Now with the proposed increase in the conforming loan limit, we can accomplish a few things. First, we take a good portion of the loans off of those jumbo markets that depend on the secondary market outside of Fannie Mae, Freddie Mac and government insured agencies. With less loans to have to sell on the open secondary market, the pricing is going to come back into line with the conforming loans. Not only will the pricing get better, but the liquidity will improve. You will have the same demand, but less product. We all know what happens when supply decreases and demand stays the same, right? A win for loan applicants is what happens in this situation.
Secondly, this increase is going to allow more people to qualify for loans in general. Loans bought by Fannie Mae and Freddie Mac don't have to fit in the same tiny box that a jumbo loan being sold on the open secondary market may have to. You can have a higher debt ratio, and you can even still obtain 100% financing. What's happening on the open secondary market is that people who shouldn't be getting loans aren't. That is not a bad thing, but the down side is that people who should be getting loans also aren't. This is going to open the door for many people who were on the cusp, oh so close to qualifying, but in the end being denied. People who almost qualified. People who qualified for $417k, but needed $425k or $475k. This is going to allow people who really should be getting loans to do so. A big win for homeowners, home buyers and really, the housing market in general.
Come read the rest of my outlook on the economic stimulus package and other current events at http://www.aboutcaliforniahomeloans.com/blog/