Is the Housing Market About to Get Squeezed with Lower Loan Limits?

Mortgage news is out that Fannie Mae and Freddie Mac, the largest providers in the mortgage industry, might be reducing their maximum loan amount sometime next spring. This means borrowers who don’t qualify according to the revised limits will be required to apply for a jumbo loan, where requirements for liquid reserves, down payments, and credit scores are typically higher and more strict than in the conforming category in which Fannie and Freddie thrive.

You may possibly need to forget about a fixed-rate and accept an adjustable-rate mortgage or chances are you’ll find yourself in a scenario where you are looking for a higher-rate purchase money second loan so that you can afford the down payment on the first mortgage transaction.

Here’s a summary of why loan amounts could slide downward and what that might possibly lead to for tens of thousands of home buyers throughout the nation who suddenly discover they’ll need jumbo financing due to changes in government.

Edward J. DeMarco, the director of Federal Housing Finance Agency (FHFA), said recently he is really thinking about decreasing the maximum loan amounts as part of a method to lessen federal participation in the mortgage sector. By how much was not mentioned, but industry experts say the maximum conforming loan amount could dip from the present $417,000 to $400,000 in many parts of the nation, and from $625,500 to $600,000 in noted high-cost areas that include California coastal cities, metropolitan D.C., New York City and its suburbs, portions of New Jersey, Connecticut, Massachusetts, Colorado, Washington, and the Carolinas.

The impact lower limits will do to the housing market.
The impact lower limits will do to the housing market.

Limits were already reduced in many parts of the country on Oct. 1, 2011 from $729,750 to $625,500 (Queens, Nassau, Suffolk). All of this could be in place as quickly as May if smaller limits get the green light next month. While it is agreed the reductions don’t appear to be much, they’ll affect significant numbers of consumers who want to purchase homes that are regarded as high-cost in nearby areas.

L.A., Santa Clara, Orange and San Diego counties, and Cook county in Illinois are expected get the worst of the squeeze according to research by Lender Processing Services.

Furthermore, reducing loan amounts in May would complicate what is already turning out to be a tricky lending environment for consumers in 2014, critics say. Taking effect in January are new federal regulations that limit debt-to-income ratios and allowable total fees in “qualified” mortgages and affect one out of every five borrowers according to industry experts.

However, to get that in motion will be a tough task for the FHFA director as a bipartisan group of 66 House members mailed a letter to him contending that in an economic stimulus law enacted in 2008 he is restricted by “distinct language” from reducing the limits specified by Congress. The legal team of the director disagrees with that interpretation. It seems like another government disagreement in another sensitive area. If the language is specific why challenge its true meaning. Our tax dollars are being wasted on his legal team. Ridiculous if you ask me.

Because jumbos are much bigger compared to conventional mortgages and start out at $417,000 to high seven figures, there are more conditions, additional fees and underwriting rules. For instance, down payments of 20 percent or more, especially on homes valued $3M and above, excellent credit scores in the high 700s, and substantial liquid assets. In comparison, conventional loans by Fannie/Freddie, are not as rigid and accept down payments of 5 percent to 10 percent with mortgage insurance.

Although, there are some jumbo lenders offering smaller down payment options on portfolio programs such as 10% to $1M, and 15% to $1.8M. Overall, some prospective buyers may need to search a little harder for financing but there are still some viable options for purchasing a home that falls out of Fannie and Freddie’s range.