Real Estate Finance Alerts

Due to the high level of interest, I will update this post as new information is available regarding the proposed increase to conforming loan limits, a.k.a. non-jumbo loans.

Updated 3/3/07

• HUD has 30 days from Bush's signing to determine the eligible areas and detail lending guidelines.
• Due to declining home values, the timeframe used to determine median area sales price will significantly impact new loan limits.
• Although some mortgage companies are stating what the new limits will be, HUD has not communicated any decision.
• Investors indicate loans with the higher loan limits will not be priced the as low as standard conforming loans and will be treated like non-conforming loans.
• Unfortunately, we will not know the eligibility or rate of loans with the temporary loan limits until HUD determines the impacted areas, details lending guidelines, and identifies any pricing adjustments.

We should have more in formation in the next few weeks. Stay tuned...

Legislation Summary
Conforming and Non-Conforming Loans
Wall Street Journal Article

Legislation Summary - Included in the recent economic stimulus plan is a temporary increase to the conforming loan limits. It will take some time to determine the new loan limits and implement the underwriting guideline changes. The increase will vary by market area and be based on median home values as determined by HUD. At this point, the limit increases will expire 12/31/2008. Depending on maximum loan amounts in each area, timing, and potential rate adjustments for the higher loan amounts, the availability and benefit to borrowers remains to be seen.

Following is a statement from a lender:

"The following must occur before lenders can accept applications with the higher loan amounts. First, the GSEs and FHA must assess their internal impacts to determine the delivery approach they will require of mortgage lenders and investors. Second, GSEs and FHA must communicate their requirements to mortgage lenders and investors. Third, lenders will work to implement the changes as quickly as possible. Due to these necessary steps, the higher loan limits offered by the GSEs and FHA as a result of this bill will not be immediately available.

Details of the GSE/FHA requirements are not finalized; however, outlined below is some information regarding what is expected as a result of the new law:
• The increases are a temporary solution for some high-cost areas based on Metropolitan Statistical Areas (MSAs).
• The higher loan limits will not be immediately available.
• Loan limits may be as high as $729,750; however, $729,750 will not be the nationwide loan limit. Increases will be available in high-cost areas based on the median area sales prices and will follow the standard HUD mortgage limit calculation process.
• To determine high-cost areas, the calculation factor will increase to 125% of the area median sales price.
• The increase applies to loans originated from July 1, 2007, through Dec. 31, 2008."

Conforming and Non-Conforming Loans - A conforming loan is one that meets the eligibility requirements for Fannie Mae and Freddie Mac. The current conforming loan limit is $417,000 for a 1-unit home. Anything over $417,000 is not eligible for a conforming loan. Prior to the increased level of mortgage defaults, the interest rate difference between conforming loans and non-conforming loans was on average 0.25%. With the higher level of defaults, and the higher risk for non-conforming loans, the rate difference is now on average 1.00%. Home owners who want to obtain a mortgage in excess of $417,000 must either obtain a non-conforming loan and pay the higher interest rate or they can obtain a first loan at $417,000 and a second loan for the remaining balance. However, the second loan will still at a higher rate, about 2.00% higher for a fixed rate compared to current conforming rates. Second loans also have higher underwriting requirements. You can see how increasing the conforming loan limits would enable more people to refinance to a lower interest rate and move from an adjustable to a fixed rate.

The Wall Street Journal - February 7, 2008
Will New Rules On Mortgages Help Borrowers?
Bill Seen Likely to Encourage Lower Rates on Bigger Loans, But Benefits May Be Limited
http://online.wsj.com/article/SB120234341375149111.html?mod=money_page_left_hs