Marketplace

The Hike in Mortgage Loan Limits

Question: I understand that the stimulus package includes a provision to raise the cap on conforming loans (i.e. when loans become jumbo). When can we expect to get loans at the new rate? Thank you.

Answer: You're right about the provision. The Department of Housing and Urban Development still has to determine the final loan limits by region. The new temporary limits will go into effect in early March and the idea is for them to last until the end of the year. The limits involve mortgages backed by giant mortgage securities firms such as Fannie Mae and Freddie Mac.

The problem was that the credit crunch and housing market debacle made lenders wary of writing jumbo mortgages. The conforming mortgage limit for Fannie Mae and Freddie Mac was a ceiling of $417,000. Any mortgage above that was considered a jumbo. The interest rate gap between a conforming mortgage and a jumbo is normally 0.25%, but thanks to the housing market nightmare it had widened to about 1.0%.

The new legislation changes the conforming loan limit to 125% of an area's median home price, with a new upper limit of $729,750. Clearly, the new limit was picked with San Francisco, Los Angeles, New York, Washington D.C., Miami, and other high-priced coastal cities in mind. The idea for the temporary hike in conforming loan limits is to make it easier for owners of expensive homes to refinance and for would-be buyers to get a better interest rate.

However, the impact of the change has been muted so far. A conventional 30-year fixed rate mortgage is currently 6.05% while a comparable jumbo mortgage is 6.94%. I'm skeptical the shift in loan limits will make much of a difference in the housing market over the next several months.

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