Several changes are afoot that may give some breathing room to the troubled parts of the housing market — which includes much of the country, even some areas here in the Peninsula. The Fed’s surprise 75-basis point rate drop a few days ago may lead to lower mortgage rates, and some of those with soon-to-reset adjustable rate mortgages may also be breathing easier.

The news today is that the House of Representatives has signed off on at least a temporary increase in the conforming loan limit, from its current level of $417,000 (more than enough for much of the country, almost irrelevant here) to $625,000, and perhaps as high as $700,000 in high-cost states. Now if the Senate and W. sign off on it, we could have ourselves a deal!

Currently, conforming loans (those which are guaranteed and resold by Fannie Mae and Freddie Mac) are limited to $417,000 in most states, but are about 50% higher in “high-cost” states like Hawaii and Alaska. By some twisted government logic, California is not included as a “high-cost” state.

What impact would raising the limit from $417,000 to $625,000 have on our local market? As a non-mortgage professional, here’s my take on it… (I’m hoping that a local mortgage expert or two may chime in here.)

First, if you’re buying a $1.5M home and putting $300K down — ie you’re borrowing $1.2M — nothing would change for you. Since you’re borrowing more than the limit, your loan can’t and won’t be resold and guaranteed by Fannie and Freddie, and the risk premium for this has increased dramatically over the last year. A quick check over at bankrate.com shows a full 1.16% price difference between a conforming 30-year mortgage at 5.25% and a jumbo 30-year mortgage at 6.41%. Sorry, you’re stuck in the 6.41% camp.

However, if you’re buying a less expensive home — or putting down a lot more money — this could help dramatically. Say you’re buying a $750,000 home and you’re planning on putting $125,000 down — ie you’re getting a $625,000 loan.

Currently, that’s above the conforming loan limit, so with today’s rates you’d be paying (click click click on my calculator) $3914 per month. If the bill passes, you could get that same $625,000 loan for for 5.25% (click click click) or $3451 per month. That’s a handy pre-tax savings of a tad over $500/month, hardly chump change.

The lesson? If this bill passes, and the numbers work out such that the home you’ve been eying would require a loan between $417,000 and $625,000, here’s what you need to do:

• Scramble, beg, borrow, steal — do whatever you need to do in order to get enough of a downpayment to bring your loan in under $625,000.
• Work with your mortgage person to get a big enough second mortgage so that your first comes in under $625,000

Further coverage:

• Brian Brady notes that some political horse-trading may be ongoing as part of the negotiations. In particular, President Bush may have dropped his insistence on increases in loan limits being tied greater regulatory oversight.
• The Front Steps blog posits that this will cause a rush of demand for appropriately priced properties in San Francisco, leading to a good year for real estate.
• A commenter at Socketsite notes the downside of this move: Hooray! Privatize profits, then socialize the losses…Now all the troubled lenders can refinance this toxic garbage and put it into Fannie/Freddie’s lap (oh, and FHA too.)…I’m saving my $300 tax rebate (that I don’t qualify for) so that I can pay my share of the bailout.
• The OFHEO (government body charged with oversight of Fannie Mae and Freddie Mac) released a hefty 19-page position paper earlier this month with some fascinating statistics. Of particular note:
  Nearly 50% — half — of all jumbo loans come from California.

  Secondly, this graph, from the same OFHEO report, clearly shows the havoc the whole mortgage fiasco has caused to the Jumbo loan market:  the difference in interest rates between conforming and Jumbo loans more than quadrupled in 2007.  Here’s how to read this graph:  In January 2007, the interest rate difference between conforming and Jumbo loans was a scant 20 basis points; a confirming loan product at, say 6%, would have a comparable Jumbo product at 6.2%; by the end of 2007, that difference had increased to 80 basis points, so a conforming product at 6% would have a corresponding Jumbo product at 6.8%.

  That’s real money, folks!

  

Caveat: I am not a mortgage broker or banker. In particular, I am not your mortgage broker or banker. The above represents my layman’s understanding of the issue. Don’t make any kind of home purchasing decision based solely on the above. Talk to your mortgage professional. ‘Nuff said.

Tags: Conforming Loans, Consumer, Fannie Mae, Freddie Mac, Mortgages, Real estate
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