Monday, March 24, 2008

Will Higher Loan Limits Matter?

The following information was sent to me Mark Stipkovich from Lawyers Title.

The huge debate in Washington regarding whether or not conventional loan limits should be raised is over. Those who wanted higher limits won with passage of the new stimulus package, a big deal because higher loan limits mean that big-ticket buyers will be able to get larger loans at less cost.

The conventional loan limit had been $417,000 before the stimulus package was passed. Loans above the limit are regarded as "jumbo" financing, mortgages for which borrowers pay a higher rate of interest.

Now the conventional loan limit will be increased to $729,750, in large measure to stimulate home sales in high-cost areas such as California, Connecticut, Massachusetts, New York and the Washington, DC area.

The FHA loan limit for "high-cost" areas in the lower-48 states will also rise to $729,750, more than twice as much as the old loan limit of $362,790.

The real estate industry has been very much in favor of the higher loan limits, but not everyone agrees.

The Treasury Department opposed higher loan limits because it wanted more regulation for Fannie Mae and Freddie Mac, huge buyers of local mortgages. Treasury officials worried that bigger loans could equal more risk in the mortgage marketplace, something no one favors.

Regardless of how the debate went, real financial decisions are no longer made just in Washington. To have jumbo mortgages -- to have any mortgages -- there must be investors who buy mortgage-backed securities. The way it works today is that a large percentage of all mortgages are sold by originators, packaged together and then used to back securities which are sold to investors worldwide. The money received from investors is used by lenders to create new loans.

If securities buyers in the Middle East, Europe and Asia don't line up to purchase mortgages with bigger loan limits then it doesn't matter what Washington wants. Without investors, super-jumbo loans simply won't be available at reasonable cost, regardless of what the rules say.

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