New limits loom on jumbo mortgages

This post comes from Marilyn Lewis of MSN Money.

The wobbly housing market is about to absorb a new blow: On Oct. 1, the government will lower the size of home loans it guarantees.

The cap on government-backed ("conforming") loans will drop from $729,750 to $625,500 in the highest-priced markets. In less-expensive counties and regions, the top loan amounts available for government support are to fall to as low as $417,000 for mortgages purchased by Freddie Mac and Fannie Mae, and to $271,050 for home loans backed by the FHA. 

Says The Washington Post:

If the loan limit is lowered, buyers trying to get into the pricey neighborhoods may be forced to stay put or scale back their aspirations. Owners of more expensive homes would have a harder time selling. And refinancing may no longer make sense for some homeowners, analysts said.

Apply now to get in under the wire

When it comes to large loans, "the time for the dirt-cheap mortgage may be running out," Keith Gumbinger, a vice president at mortgage research firm HSH Associates, told the Post.

The Wall Street Journal gives this example of what the change can mean to homebuyers:

Craig Van Sant is looking to pay $500,000 for a home with a $20,000 down payment in Rancho Cucamonga, Calif. Once the FHA limit drops to $335,000, he would need to more than double his down payment. The only upside, he said, is that "home values slide even more, allowing us to buy more house, if we can pull together all the cash."

In expensive regions, even entry-level and middle-class homes will be affected.

Top amounts vary from county to county:

• This interactive Wall Street Journal map shows the new loan limits (zoom in to see individual counties, out for the national picture).
• Also, the new loan limits are listed by county in this spreadsheet at the Fannie Mae site.

Loan processing can take months, so borrowers hoping to take advantage of the current rules should apply for mortgages soon. Says the Post: "Rep. Brad Sherman (D-Calif.), who co-wrote a bill that would extend the larger loan limits permanently, said, 'Bottom line: If you are going to buy or refinance, get it done by September 30 if at all possible.'" (Is it time to refinance?)

More jumbos

Government-backed mortgages are cheaper because of the guaranty that investors buying mortgage-backed securities will be repaid if homeowners default.

Loans too big for government guaranties, called "jumbo" loans, "generally require at least 20% down . . . and their rates can be about half a percentage point higher," according to the Post.

In the early 1970s, the limit on 30-year, fixed-rate mortgages that the government would support for single-family homes in the continental U.S. was just $33,000. By 2006 it had grown to $417,000. (Higher limits were -- and still are -- allowed in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.)

In 2008, Congress temporarily raised the upper limit from $625,500 to $729,750 in the highest-priced housing markets to help stimulate homebuying. Except for a brief time, that higher limit has remained in effect.

Test case for private industry

High-priced markets on the coasts "will serve as test cases for how the government's withdrawal from housing will affect the market and local economies," writes the Journal.

Critics worry these lower limits may further damage the fragile national housing market and drag down housing prices even more. They want Congress to at least postpone the change until home values stabilize.

National Home Builders Association researchers predict that lower caps "will reduce housing demand and place downward pressure on home prices in major housing markets." But Congress shows no sign of extending the deadline limit.

That's fine with those eager to end government domination of the mortgage market.

The Wall Street Journal says:                         

Now those limits are set to decline modestly in hundreds of counties across the U.S. as the government attempts to reduce its outsized footprint in the mortgage market and create room for private investors to compete. Government-related entities stand behind more than nine of 10 new mortgages, and taxpayers have sunk $138 billion into Fannie and Freddie, underscoring the eagerness to dial down the government's share.

The question is, when to begin pulling back and how fast to go. The Journal's real-estate blog, Developments, says:

 "It's a tough call," says Richard Green, director of the University of Southern California's Lusk Center for Real Estate. While he says it's a "good natural experiment" to roll back lending support for higher-priced properties, he adds, "With the housing market as weak as it is, one reasonably wonders whether it's good to do anything."

Among many reader comments to the Journal stories was this, by "SHERIDAN ERICKSON:"

This is totally idiotic. A potential homebuyer getting a guaranty with taxpayer dollars to buy a $625,000 home. Think about that. It risks $625,000 of other people's money for the sole benefit of one person.

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