Dennis' Mortgage Blog

Last week the stimulus package finally got through the Senate and it appears to be headed to President Bush’s desk for signature sometime next week. While the stimulant part of the package is very debatable as to its effectiveness, what is not debatable is that the markets—such as Southern California—that will benefit from the higher loan limits will see an increase in activity. The maximum limits for FannieMae/FreddieMac and FHA are now $729,750 or 125% of an area’s median home sales price—whichever is lower. (For areas with median home prices below $325,000 do not worry your Fannie limit is still $417,000.) Before getting excited that you may be positively affected read on to some of the limitations. Keep in mind as well that after President Bush signs off on the bill several government agencies, plus Fannie and Freddie, have to implement the limits, pricing and determine the formula for median price calculations. Those who read my Financial Wire learned here (click on “Battle of the Warring Price Indexes) how the prices are calculated. So a lot of work will have to be done before we see actual changes in our markets and programs.

What’s in it for Me? From the analysis I have read so far from various sources most of the country will not be benefiting from the higher loan limits. Only about twenty markets across the country will see their loan limits increase through the new plan, and only six will see the maximum loan limits applied to their area—of the six that are predicted to max out at the $729,750 five of the areas are in California (yeah!). Here is a chart from the National Association of Realtors for the highest median areas:

So if you are in one of the areas where the median price is above $320,000 you should see an increase in the conforming loan limits. Since my client base is California practically all of my client base will see an increase to the new maximum loan amount—as currently presented.

The new loan limits only apply to 15 and 30 year fixed fully amortized products for owner occupied single family housing (although there is some speculation that perhaps a 5/1ARM may be included.) What loans will not be available to the new limits: no interest only financing, no multi-unit (current limits which are all above the $417,000 single family unit apply), no adjustable products and no investment properties. By some calculations only about 15% of the existing non-agency (i.e. not Fannie Mae or Freddie Mac) mortgages will be eligible for refinancing.

The cap on the mortgages is most likely to be 90% combined loan to value—which will be a boost of 5% for most of California that is currently capped by most lenders at 85%.

What Cost?

As I mentioned in previous posts on this site there is very strong sentiment that there will be “add-ons” or “overlays” or “tiered pricing” for the new product. These price adjustments can be something on the order of adding 0.25% for loans between $417,000 and $600,000 and add 0.50% to loans over $600,000 to the maximum loan amount; add 0.500 points to the fee (about 0.125% in rate) for loan to values over 80%, add various prices to FICO scores below certain levels, etc. By the way Fannie and Freddie have been having these add-ons to pricing for loan to values and FICOs for several months now.

Why? Because initially there is great uncertainty if there is a secondary market for the new mortgages. If they lend the money will anyone buy the paper? Our current difficulty with Jumbo financing and why the rates are so high relative to conforming loans is because there is little interest on Wall Street to purchase Jumbo mortgage bonds or securities. Just because the Federal Government says, “in certain circumstances treat $700,000 mortgages the same as you would $400,000 conforming loans…” does not mean investors have to back the plan by investing their millions and billions. The new loans will have a higher risk factor for investors due to the higher investment per borrower they are financing (i.e. they can lose $700,000 in one loan as opposed to $400,000 in one loan today if borrower has difficulty and goes into foreclosure) and as such will need a higher rate of return. While the spread today is about 1% between Jumbo and Conforming mortgage rates, the new loan limits should cut that spread in half for those that qualify.

So while the loan limits will increase, so should the price compared to what is the current conforming loan limits; however any increase should be significantly below the current jumbo rates and differential to conforming loans.

Who Benefits?

Those looking to borrow between $417,000 and $729,750 who have the appropriate amount of equity to refinance or cash for down payment who qualify for a fully amortized 15 or 30 year fixed rate mortgage at a rate higher than the current conforming rate and lower than the current jumbo rates—a somewhat narrow base for most areas of the country, but higher than many people think in many parts of California. You currently have a $675,000 mortgage on your $1,000,000 home with a loan you took out in 2006 that was fixed for 3 years at 6.25%; have solid FICO scores and income over say $100-120,000 per year? You probably stand to benefit by refinancing to 6% or below depending on how the market goes. If you are self-employed and your income taxes show you make only $50,000 per year after all your write-offs and expenses (wink, wink, nudge, nudge) you probably will not benefit as you will run into the qualifying issue. Case by case tens of thousands of Californians could benefit from this portion of the stimulus package depending on what layers are added onto it as it becomes implemented.

When Will I Be Able To Take Advantage Of The New Limits?

The timing is predicted to take about a month before we are able to take applications and lock in rates and terms for borrowers. Many of our lenders will give us timing factors in the next week or so as to when they expect to be able to start funding the new loan limits. Since they have no idea as to the overlays charged by Fannie and Freddie they cannot price the loans yet so there is no way to lock in borrowers applications.

So if you are in the segment of the population that may benefit from the expanded loan limits give me a call and let’s start working on your package---but hurry because the limits are set to expire and revert to the current limits on December 31, 2008!

Dennis

Monday, February 11, 2008