Update: HUD has released the new loan limits. Find your local loan limit here.

President George W. Bush is scheduled to sign H.R. 5140, better known as the economic stimulus package into law on Wednesday. The package, which was passed by both houses of Congress at what looked like warp speed compared to the way most legislation is handled these days, is intended to address the fear of recession that is paralyzing the stock market and causing consumers to cut back on spending.

In spite of pleas from the National Association of Realtors' and the National Association of Homebuilders that the package strongly address the subprime mortgage situation and the declining housing market, the final version of H.R. 5140 is mostly about rebates for tax payers and tax incentives for small businesses.



Still, the housing industry will get one bit of help out of the new legislation. Title II will temporarily raise the conforming loan limits for loans that can be purchased by Fannie Mae and Freddie Mac and for loans that can be guaranteed by the FHA. This will make it easier to obtain mortgages to purchase or refinance homes in more expensive markets; the more loans the two Government Sponsored Enterprises can purchases the more money there will be available for lending. The current maximum loan that Freddie or Fannie can purchase is $417,000 and the limit for FHA loans is somewhat lower.

The legislation is geographically specific and will provide assistance only in those areas where housing prices are well above the national average. The legislation reads that the loan limitation "on the maximum original principal obligation of a mortgage that may be purchased...shall be the higher of-

  1. the limitation for 2008 (i.e. $417,000); or
  2. 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation for 2008.

In other words, Fannie and Freddie cannot purchase any loan for which the original principal balance exceeds $729,750 or 175% of the 2008 limitation. However, in most parts of the country where median prices are under $250,000 the limit will remain at $417,000.

It is not possible to know specifically what the impact will be on one area or another but the legislation mandates that the Secretary of Housing and Urban Development publish the median prices and corresponding loan limits within 30 days of the enactment of the legislation.

As an example (thanks to the website of Congressman Vita J. Fossella (R-NY), in the 13th Congressional District (Staten Island, Brooklyn, and New York City) among the highest cost areas in the country, the median price of a single family home is approximately $550,000, therefore the new loan limits for Fannie or Freddie approved mortgages will be raised to $687,000 (median price x 125 percent) in that area.

While the point of the change in conventional loan limits is to free up funds for new loans, Congressman Fossella points out an additional benefit to homeowners when "jumbo" loans become conventional:

"The current national average for a 30-year fixed jumbo loan is 6.56% while the interest rate for a 30-year fixed conforming loan is only 5.45% for qualified buyers. For example, on a $550,000 mortgage, the savings is about $390 per month, or more than $4,600 a year - or $138,000 over the life of the mortgage. The savings on a $650,000 mortgage would be about $460 a month, more than $5,500 a year and more than $165,000 over 30 years."

The changes for FHA borrowers are more complicated. Existing loan limits for FHA are lower than those for Freddie and Fannie and vary by metropolitan statistical area. For example the maximum FHA loan in Boise, Idaho is currently $230,850. In Omaha Nebraska it is $200,160; and in New York's 13th District $362,790. The latter amount appears to be the highest limit in the contiguous 48 states. Thus, using 175 percent of current limits the new limit for New York will be $634,882 and Boise would be, under the formula, $403,987. However, Boise will actually have a new limit of $417,000 because the new loan limit for FHA loans will, in no case, be less than that amount.

Peter Coy, writing in Business Week maintains that this change in loan limits will only impact 20 of 160 metro areas in the United States where home prices are highest. These generally tend to be on the East and West Coasts. He also claims that the market will be charging a premium for mortgages that are close to the higher limits and that premium may partially offset the reduced interest rates home buyers would enjoy under the higher loan limits.

As stated at the beginning, this provision is indeed very temporary. It was made retroactive for loans that were originated during the period beginning July 1, 2007 and it ends on December 31, 2008. The retroactive nature of the legislation will allow lenders to package and sell many of the so-called jumbo loans that were originated earlier, thus freeing up money to make more loans. However, the new limits will apply to loans originated during this period for the life of the loan, so the loans can be repackaged and resold at any time.