Rates may shrink on big home loans

Homeowners and homebuyers who live in expensive housing markets may be pleased to learn that the federal government recently increased the size of mortgages that Fannie Mae and Freddie Mac can purchase and the Federal Housing Administration (FHA) can insure. The higher loan limits are expected to help people in high-cost housing markets buy homes and refinance existing mortgages, though the extent of such aid won't be assured until the new programs are put into place.

The higher loan limits were part of the economic stimulus package that President Bush signed into law in February. At that time, the loan limit for Fannie Mae and Freddie Mac was $417,000 in high-cost markets, except for Alaska, Guam, Hawaii and the U.S. Virgin Islands, where the limit was $625,000. The new limits will be based on a percentage of the median home price in each county and could be as high as $729,750 in some areas.

The FHA loan limits, which already varied depending on the cost of housing in each metropolitan area, were set at $200,160 in so-called "normal" housing markets and $372,790 in expensive housing markets. Those limits will now be $271,050 in normal markets and up to $729,750 in some expensive markets.

Loans that can be sold to Fannie Mae or Freddie Mac are known in the mortgage industry as "conforming loans" because they conform to Fannie Mae's or Freddie Mac's guidelines. Loans that can't be sold to those corporations, either because the principal balance is too large or other guidelines aren't met, are known as "nonconforming loans." Oversized nonconforming mortgages are often called jumbo loans.

The law instructed HUD to publish the new conforming and FHA loan limits for each county within 30 days after President Bush signed the legislation, which would set a March 14 deadline. Until then, it's nearly impossible to pinpoint the limits for each county because the law is very technical and HUD hasn't yet said which data source it will use to set the median home prices.

Lenders won't be able to originate the larger conforming or FHA-insured loans until HUD announces the new limits and Fannie Mae, Freddie Mac and the FHA establish their own guidelines for these loans. Those guidelines likely will specify requirements for the borrower's down payment, credit score and other qualifications. The new loans may also have different fee schedules.

The chief benefit of the higher loan limits is expected to be lower interest rates on loans that were classified as jumbo mortgages, according to Dr. Tracey Seslen, an assistant professor at the University of Southern California Lusk Center for Real Estate in Los Angeles. Lower interest rates would "make borrowing cheaper for people who have been stuck in jumbo loans (and would) be a very positive thing," Seslen says.

Recently, interest rates on jumbo loans have been approximately 1 percent higher than rates on conforming mortgages, according to Shane Backer, a branch manager at Robbins & Lloyd Mortgage in Manhattan. If that spread narrowed, home buyers in high-cost housing markets would be able to borrow more money to buy a home while homeowners in those markets who refinanced a larger loan could save hundreds of dollars each month on their house payments, Backer explains.

Freddie Mac CEO Richard F. Syron recently told a group of home builders at an industry convention that the higher limits should allow the two mortgage finance companies to "inject liquidity and thus help enable reduced rates within this jumbo market." However, the new law doesn't mandate lower rates and neither Fannie Mae nor Freddie Mac nor the FHA has promised lower rates on the new bigger mortgages.

Lower interest rates on bigger mortgages could make housing more affordable in high-cost housing markets and that could spur more sellers to put their homes on the market and entice more buyers to purchase those homes in those areas, Seslen suggests. "If people see an opportunity in the form of cheaper borrowing, that could be the tipping point that gets a lot of people back into the market," she says.

The higher loan limits are set to expire at the end of this year, though Congress could make the new limits permanent or extend the deadline, Backer suggests. "I think they will extend (the higher loan limits), if it helps the economy."

X...X...X

The benchmark 30-year fixed-rate mortgage fell 9 basis points, to 6.32 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.39 discount and origination points. One year ago, the mortgage index was 6.19 percent; four weeks ago, it was 5.78 percent.

The benchmark 15-year fixed-rate mortgage fell 8 basis points, to 5.79 percent, and the 30-year fixed jumbo, for loans greater than $417,000, was unchanged, at 7.43 percent. The benchmark 5/1 adjustable-rate mortgage rose basis points, to 5.72 percent.

(Distributed by Scripps Howard News Service. Reach Marcie Geffner at editors(at)bankrate.com.)

(Distributed by Scripps Howard News Service. E-mail Holden Lewis at hlewis(at)bankrate.com)