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New Loan Limits Will Significantly Affect U.S. Housing Market

September 20th, 2011 11:24 AM by Uletas Greene Carter

At issue are the limits for so-called conforming mortgage loans that can be brought or guaranteed by Fannie Mae, Freddie Mac, and the Federal Housing Administration.  These mortgages have the indirect backing of the U.S. government, which lowers their interest rates and down payment requirements.  In 2008, at the height of the financial crisis, Congress temporarily raised the conforming loan limit from $417,000 to $729,750 in affluent areas to boost the unstable housing market.

On October 1, 2011, those higher limits are scheduled to drop back down in expensive markets nationwide -- ranging anywhere from $483,000 in counties like Monterey, CA, to $625,500 in cities like New York and Washington.  As a result, about 1.4 million homes will be pushed out of eligibility for lower-rate conforming loans, according to the National Association of Home Builders.  Homeowners looking to buy or refinance those properties will have to take out "jumbo mortgages," which require a much larger down payment -- generally 20% to 30%, compared with the typical 10% for conforming loans and will carry interest rates that are usually a half to three-quarters of a percentage point higher.

The bottom Line?  More downward pressure on prices in high-end markets.  The new loan limits will affect approximately 8% of the total U.S. housing market, according to industry estimates, which will have a noticeable impact across the Northeast and California, as well as parts of Florida and Illinois.  Of major importance is that if expensive homes stop selling, then prices for houses under them will feel the pressure too.

While many experts support the idea of weaning the jumbo mortgage market off government financing, they worry about making the move while the housing sector is still trying to clear an overflow of inventory.  Reducing the conforming loan limits will test whether private lenders are willing and able to step up to the plate, but doing so this year may be premature.  "The cost to the housing market and economy of a misjudgment would be high." Says Mark Zandi, chief economist at Moody's Analytics.

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Posted by Uletas Greene Carter on September 20th, 2011 11:24 AM



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