The Following Article is from the Fall 2011 Newsletter
On Oct 1, 2011, maximum loan limits for the government sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, will be lowered in high-cost markets. The drop will be from their current temporary levels to reduce limits based on criteria established by Congress in 2008.
Currently, the loan limit for Fannie Mae and Freddie Mac backed loans in “conforming”, or non high-cost markets is normally $417,000. However, in high-cost areas, where a statutory formula based on local median home prices produces a level above the base limit, this limit can be as high as the national ceiling of $729,750.
As part of the Economic Stimulus Act of 2008, and in an attempt to help the struggling housing market, the federal government, each year since then, has passed special legislation supporting higher than normal loan limits for prospective homeowners in the high-priced housing markets. The last such legislation, H.R. 3081, is set to expire at the end of September.
Unless Congress acts again- as of this writing it hasn’t occurred- to extend these levels, they will revert as of October 1st to the lowest permanent criteria for high-cost areas. The readjusted limits are determined according to the Housing and Economic Recovery Act of 2008. The base limit will remain at $417,000 for most markets, but the readjusted formula for establishing limits for high-cost areas will drop from 125 to 115 percent of the area median home price, with the national ceiling dropping from $729,750 to $625,500.
Originally, the rationale for the higher limits was to assure that prospective home buyers in these high-cost areas had access to home loans with the same available mortgage rates as home buyers in other lower cost areas. Home buyers in lower-cost areas had access to “conforming” loans, whereas borrowers in high-cost areas usually were relegated to “jumbo” loans, which came with higher costs interest rates.
Once the higher loan limits decrease, loans falling outside the new lower conforming loan limits will likely be subject to higher down payment requirements and tighter credit score requirements. The expected result of this will be a decrease in demand for such homes, thus placing downward pressure on home prices.
As noted above, along with Fannie Mae and Freddie Mac, the loan limits for the FHA loans will also decline come October 1st due to changes set in the new law. FHA loan limits are set slightly different than those for Fannie Mae and Freddie Mac. By law, the lowest limit for any county for one-unit homes is $271,050. The ceiling for FHA loans currently cannot exceed $729,750, but that ceiling is set to decline on October 1st to $625,500. The loan limits for mortgages guaranteed by the Department of Veteran’s Affairs (VA) will not change again until January 1, 2012, though they will also be subject to lower limits,
As of this writing, mortgage interest rates were very favorable, so this is yet another reason to not linger in making the decision to get started on that next home purchase or refinance.
John Ciolino is a Senior Loan Consultant with First Capital Mortgage in Santa Monica.