What does it mean that there are “new loan limits?”

Question of the week:  What does it mean that there are “new loan limits?”

Answer: The Federal Housing Finance Agency (FHFA) was created in 2008 by the Housing and Economic Recovery Act (HERA) in reaction to the housing and mortgage market meltdowns. The FHFA is responsible for the supervision and regulation of Fannie Mae, Freddie Mac and several other entities that are involved in residential lending. Since 2008 the FHFA has also been the conservator of Fannie and Freddie.

Fannie and Freddie, also known at Government Sponsored Entities, or GSEs, purchase the majority of residential mortgages that are funded in the United States, and then sell the mortgages to investors on the secondary market. This flow of funds and mortgages is able to occur on such a large scale because all loans that are sold to the GSEs are underwritten and funded under uniform guidelines and regulations.

Loans purchased by the GSEs are considered “conforming” or “conventional” mortgages because they fit the underwriting guidelines.

Part of the uniform guidelines are maximum loan amounts established by the FHFA for the GSEs for the loan they can purchase. In 2008 to free up fundings for homebuyers and homeowners to purchase or refinance mortgages, thereby helping the recovery of the housing markets, the FHFA created a second-tier of loan limits for GSEs, thereby extending the guidelines for conforming loans to a greater percentage of the housing market.

Conforming mortgages purchase by either of the GSEs are either labelled “conforming” or “high-balance” depending on the loan amount. For 2020 the maximum conforming limit nationwide was $510,400. The high-balance limit is not uniform across the country, and varies from county to county. The highest limit for high cost counties, such as Los Angeles and Orange Counties, for 2020 is $765,400.

Loans that are over $765,400 or do not fit the guidelines of the GSEs are generally labelled as “Jumbo” or “non-conforming” (unless they are VA or FHA—a different question of the week). These non-conforming loans are not sold on the very large and fluid secondary markets of Fannie and Freddie, but are purchased from lenders by large investment companies and banks. Because the risk of the mortgages is not spread across a range of investors the guidelines are generally tighter and harder for qualifying.

Under the HERA act, the FHFA adjusts the conforming, and high-balance conforming, loan limits every November for the upcoming year. The loan limits are adjusted in accordance to the average priced home sale in the United States from October to October; the county by county limits for high-balance loans are set according to the home prices in those areas.

For 2021 the loan limits will be $548,250 for conforming and $822,375 for high-balance mortgages; both increases are 7.4% higher than the 2020 limits.

Many lenders are currently taking applications for the new high-balance mortgages, enabling many borrowers to obtain a conforming mortgage whereas a week or so ago they would have been restricted to a jumbo mortgage.

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Employment Friday, as it does on the first Friday of every month, the Labor Department released data for the prior month today. The economy added 245,000 jobs in November, the fewest added in single month since the recovery began in May. Economists making guesses as to how many jobs would be added were way off as their consensus was 432,000 new jobs. The biggest factor in the large drop off in new jobs was a drop of about 100,000 government jobs, off-setting the 344,000 private sector jobs created. With the increase in new hires, the unemployment rate dropped from 6.9% to 6.7% in November. A significant factor in the drop in the unemployment rate was 400,000 people dropping out of the labor force due to either stopping to look for work or had to care for a family member who was infected with the coronavirus.

Pressure on Congress to pass another stimulus bill should be rising with the jobs data, adding to pressure of knowing that December’s jobs data will likely show a decline in the labor force as more workers are laid off due to increasingly stronger shut down orders across the country. Typically November and December are strong months for adding jobs due to the number of temporary workers hired for holiday shopping and spending, this year those hires will likely be restricted to on-line retailers and delivery companies.

Overall the news is positive for lower rates as the data portends a slow down in consumer spending and the economy.

Rates for Friday December 4, 2020: Rates bounced of the prior week lows last week ahead of Thanksgiving and have not drifted back down. Yet.(?) Even with the positive but not great jobs data the sentiment is that the economy will have a few more rough patches before it regains a lot of positive momentum as result of a viable and widely available vaccine for Covid-19. This should keep upward pressure off of interest rates through New Year’s and likely into February or March.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                             2.50%   Flat

30 year high-balance conforming                   2.75%    Flat         

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. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Our normal Thanksgiving table usually has ten to twelve, thirteen, fourteen people seated and enjoying each other’s company. Before ordering our turkey for our dinner I asked Leslie how big we should get it, knowing it would only by she and I and our youngest daughter. She quickly indicated that we should get the same size bird so we have more leftovers than usual.

Okay then! The result was my prep and cooking for dinner was the same amount for the three of us as it would be for our usual table filled with family members. Our leftovers have lasted the week, with a bit of turkey meat and half a carcass in the freezer for some soup in the near future. Good call Leslie!

I hope you had a wonderful Thanksgiving with whomever and how many others you chose to join in giving thanks.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog