Dennis' Mortgage Blog

Question of the week:  Is it true the maximum loan amount for conventional and FHA mortgages is dropping in October?

Answer:  Yes it is true that the maximum conventional/FHA mortgage limit will drop to $625,500 for all areas, including “high cost” areas currently with loan limits for single family mortgages to $729,750 effective October 1, 2011.  That means that any loan greater than $625,500 up to $729,750 must fund on or before September 30, 2011 (most likely September 29^th for Los Angeles County and other counties that do not allow same day funding and recording).

Tracking back further on the date, while we have not heard from all lenders yet, many are indicating that due to their purchase of commitments from Fannie Mae or Freddie Mac they must have loans in the reduction zone (greater than $625,500 up to $729,750) must be submitted/registered with them prior to August 1^st, giving us two weeks to get the application and processing completed on these mortgages.

In the grand scheme of things the reduction in the mortgage limit impacts a very small percentage of the industry.  However if you have a home on the market, are negotiating a purchase, considering refinancing your home, where a mortgage in the reduction zone will be impacted than it will have a tremendous impact.

Primarily the impact is the result of equity requirements.  The biggest advantage of the higher loan limits is the ability to obtain a mortgage with less than twenty percent equity.  For FHA you can purchase or refinance an existing mortgage to $729,750 with only 3.5% equity in your property (85% equity if you are getting a cash out refinance).  With a conventional mortgage you are able to finance up to 90% for a purchase or refinance and existing mortgage.

With the new loan limits in place the amount of equity required for loans greater than $625,500 will increase for the vast majority of mortgage products and there are very limited products available for 90% loan to value mortgages.

With the deadline approaching those who are in a lender controlled transaction (short-sale or foreclosure purchase) where the lender has not yet approved the sale terms should take particular notice if the mortgage required to purchase the property is in the reduction zone the mortgage is greater than 80% loan to value. 

Even though the loan limit reduction affects a very small percentage of the market, it does have an impact by reducing the number of qualified buyers for homes priced greater than about $650,000.  Any time the number of qualified buyers is reduced in a market the demand is reduced.  Basic economics is lower demand results in lower prices.  At a time when the housing markets are a long way from any recovery lowering the maximum mortgage amounts hinders rather than helps recovery of the market.   

Not just home buyers and sellers are impacted by the lower loan limits.  Home owners eligible to refinance to a lower rate and payment or convert from an adjustable rate to a fixed rate mortgage under the current mortgage limits may be unable to refinance depending on the value of their property.  This could lead to more defaults or distressed properties for homeowners with loans greater than $625,500 who will be unable to refinance to lower payments.

There is a bill going through Congress sponsored by Rep. Gary Miller that would make permanent the existing loan limits.  Whether it can get through the process before September 30^th is doubtful, especially with the more important debt limit negotiations taking up most of the Congressional resources.

If you are considering buying, selling or refinancing a home where a loan greater than $625,500 would be involved you have a very limited time frame in which to complete the transaction.  If I can be of service please contact me to discuss your options and get you started so you can complete your transaction in time.

Have a question for me?  Ask me!

This week’s blog postings:

Note that I have created a new YouTube channel where I will post my mortgage video-blogs. You can check in whenever you like to see past blogs, or subscribe and be notified when I update the channel with a new posting.  I am trying to keep the videos from two to five minutes, informative and hopefully entertaining and educational. The channel is www.youtube.com/stratisfinancial

Jobs, Jobs, Jobs A video look with charts as to the employment situation in the United States and the three major reports that follow employment data.  What is difference between employment rate, non-farm payrolls and unemployment insurance filings? Watch the video to see.

Good News On Home Sales A blog post on the Southern California housing market data from DataQuick for the month of June.

Fed QE Numbers A video look at the amount of money spent by the Fed on Quantitative Easing (QE), both one and two, and what difference it may, or may not, have had on our economy. Also a surprise at the end showing who has benefited the most from the money from the Fed.

Rates started the week very well but fizzled towards the middle of the week. There was no economic news to push rates up, or have them move sideways, beyond some inflation concerns.  Fed Chief Ben Bernanke told Congress that if necessary the Fed would print more money to try to push the economy along (refer to Fed video above to see what difference it may make).  Rates sort of yawned at that.  Producer Prices were somewhat flat, mainly due to the drop in oil prices in June, taking out energy costs and prices went up some.

News today on Consumer Prices and Consumer Sentiment gave no reason for rates to climb.  In June the CPI went down 0.2% in June due to dropping costs for oil and gasoline. Stripping out energy and food costs provides the “core” CPI number, which is what the Fed uses as its primary inflation gauge, was up 0.254%.  The most important piece of data was that the 6 month CPI number annualized is at 2.5% inflation—right in the Fed’s target range for where inflation needs to be for economic growth.

Not to be a spoil sport…but I usually am.  Even though the core CPI number is in the target range where the Fed sees economic growth that is sustainable and healthy, unfortunately the economy is not just prices.  If inflation is between two to three percent with a growing job market, strong consumer sentiment and the inflation is the result of increased demand, then yes the six month CPI number would signify a growing economy.  Unfortunately we have had fourteen weeks of initial unemployment claims over 400,000; we have consumer sentiment continuing to be not so positive; we have retail sales that are flat; we have no consumer demand or potential demand that would signify an economy that is growing.

As I point out in the Fed video one of the primary results of the trillions from the Fed, and federal government, has been rising commodity prices.  Rising prices with rising unemployment do not make a healthy economy.  But does make for a  higher Consumer Price Index.

Rates for Friday July 15, 2011: Pretty much no change in rates from last Friday.  Despite the economic data that normally leads to lower rates we have seen rates move sideways.  A weird market that seems poised to move either direction—but should be moving down.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS*

30 year conforming                               4.375%             Flat

30 year high-balance conforming           4.50%               Flat

30 year FHA                                         4.138%             Down 0.19%

30 year FHA jumbo                              4.206%             Down 0.007%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

* Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

A quasi-political note this week instead of the usual personal note to finish my update. 

I am very frustrated by the talks in Washington centered on the give and take between Republicans and Democrats that will result in raising the federal debt ceiling.  One side is dug in on not raising any taxes and the other side is dug in on demanding taxes be raised. 

With all the posturing, haggling, politicking and name calling going on the primary problem that endangers our nation’s future is being obfuscated and left out of the news conferences and the media reporting.

What they are haggling over is deficit reduction, how much to reduce future deficits. 

Deficits.

The Republicans and Democrats are arguing over how much less to borrow in the future.  Not how much to save.  Not how much to spend so it equals how much is received in taxes.  They are arguing over how much to borrow at a time when our federal debt is at $14,501,166,200 as I write this at 2:27 PM Pacific time on July 15, 2011.  Click on the link and do the math to see how much it has gone up since I type and you read that number.

The numbers that are being debated in Washington for deficit reduction are pretty much inconsequential.  If Congress has zero increase in spending for the next decade even the largest deficit reduction mentioned so far would still mean that Congress has to borrow almost $1 trillion ($1,000,000,000,000) every year, or another $10 trillion over the next decade.

What our national leaders should be debating and coming to a solution to is debt reduction.  Not deficit reduction that continues to increase our debt.  But debt reduction. 

Our current debt is at 98% of our gross national product.  Remember all those 100% loans that helped cause pop the housing bubble? 

We have a borrowing problem.  The best way to stop a borrowing problem is to stop a spending problem.

Off my soap box.

Have a great weekend; call me if I can be of assistance.

Dennis