Changes in Loan Limits Will Impact Few Home Buyers
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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-
- the limitation for 2008 (i.e. $417,000); or
- 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.
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