Raising the roof on conforming real estate loans
Editor's note: This column has been updated to provide more background on how the conforming loan limit is determined, and to correct factual errors.
In the world of financial services sometimes the easiest solutions are the hardest to implement. For some of us observing the crosscurrents in the real estate market, that certainly seems to be the case with mortgages.
President Obama and probably even the Tea Party Republicans would like to see more people buying homes today, yet we continually create impediments to that. One of those roadblocks is what is known as the conforming loan limit, which sets the highest value of a mortgage that Fannie Mae and Freddie Mac can buy or guarantee.
The conforming loan limit has traditionally been tied to the average house price in the Monthly Interest Rate Survey (MIRS) of the Federal Housing Finance Board (FHFB).
When home prices crashed, Fannie and Freddie's federal regulator (which today is known as the Federal Housing Finance Agency -- not to be confused with FHA) and then Congress decided not to make corresponding reductions in the conforming loan limit. The limit, which used to be adjusted annually, has remained at $417,000 since 2006.
Congress raised the ceiling on the conforming loan limit in high-cost markets -- creating the so-called "jumbo conforming limit" -- to $729,750 in 2008. Lawmakers acted after the secondary market for loans not guaranteed by Fannie Mae, Freddie Mac and FHA collapsed, making jumbo loans expensive and hard to qualify for.
The jumbo conforming loan limit ranges between $417,000 and $729,750 in high-cost markets, and is determined by multiplying the median home price in a given market by 1.25.
Some industry folks like John Walsh, president of Total Mortgage Services LLC in Milford, Conn., are advocating raising the conforming loan limit nationwide and giving all homebuyers who need it access to bigger mortgages.
"We get plenty of people purchasing or refinancing -- in an area that does not have maximum loan limits -- asking if we would be able to do the mortgage for them," Walsh said. "But, because they are one town over or one street over, they don't qualify for the higher-balance conforming loan limit. It's one less purchase, one less refinance where we could save the homeowner $300 or $400 a month, which they could then pump back into the economy."
Walsh operates in the Northeast, where he says some markets in commuting distance to the Big Apple are considered high-cost areas but a little further out others are not, although homes are of equal value in either community.
"It's like selective lending out there," he said. "If you live in Fairfield, Conn., you are OK, but if you are someone who has the same job, with the same house value, with the same credit score but live across the street in another town or county, you can't get the same mortgage. The question is why? If a loan has to stand on its merits and the house stands on its merits of valuation, why not?"
He added, "Just because I live in Omaha, Neb., instead of Fairfield, why shouldn't I be able to get the $729,750? A loan is a loan is a loan."
The rationale behind the conforming loan limit has been to ensure that Fannie Mae and Freddie Mac's loan guarantees mostly benefit low- and moderate-income borrowers who otherwise might not be able to afford home ownership.
The Federal Housing Administration (FHA) has its own "floor," or maximum loan amount in "normal" housing markets, which is tied to the conforming loan limit.
FHA will back loans of up to $271,050 in "normal" housing markets -- an amount equal to 65 percent of the confoming loan limit. In high cost markets, FHA is permitted to insure loans of up to 125 percent of the median home price, with the same $729,750 ceiling as Fannie and Freddie.
So the limit for FHA borrowers in a "normal" market like Omaha, Neb. is $271,050, while Fannie and Freddie will back loans of up to $417,000 (lookup FHA mortgage limits here). Elevated home prices in Fairfield County, Conn. mean that the upper limit for Fannie, Freddie and FHA mortgages in Fairfield is currently $708,750.
Another issue with the "jumbo conforming limit" is its temporary nature.
To stimulate the economy and keep higher-end markets fluid, the Economic Stimulus Act of 2008 created the jumbo conforming limit, setting its ceiling at a testosterone-fueled $729,750 -- 175 percent of the conforming loan limit.
Although the ceiling was briefly allowed to drop back down to $625,000 in early 2009, the higher jumbo conforming limit was quickly restored.
The latest extension of the jumbo conforming loan ceiling is in effect until Sept. 30, 2011, when it will be reviewed again.
The California Association of Realtors, representing a state with numerous metros considered high-cost areas, collectively breathes a sigh of relief every time the extension of the jumbo conforming loan limit is passed.
"It certainly would be better to have it permanent, but that doesn't seem to be the way things are going in Congress right now," said Leslie Appleton-Young, CAR's vice president and chief economist. "Obviously, even with the decline in prices in California, we are still well above the national median in many areas."
Fannie and Freddie has jumbo conforming loan limits above $417,000 in effect in all but 19 of California's 58 counties -- (see Fannie and Freddie conforming loan limits by county).
Without the extension, such pricey home markets as San Francisco, Los Angeles and all of Santa Barbara and Orange counties would be hurting because it would be difficult to get financing to buy or refinance almost any house in those geographic designations. Fannie and Freddie currently back loans of up to $729,750 in those four and 10 other California counties.
"Financing is much more readily available if you have a loan that Fannie or Freddie will buy in the market," Appleton Young said. "A jumbo loan would be more expensive with tighter underwriting and a higher down payment. Without Fannie or Freddie in the market, there wouldn't be a lot of transactions going on."
Unfortunately, because designated high-cost areas are limited, if you are trying to sell a home in California's Shasta, Merced or Humboldt counties you are not going to get the same break (Fannie and Freddie's conforming loan limit is $472,500 in Merced County, $423,750 in Shasta, and $417,000 in Humboldt).
That's the inherent inequality that bothers Total Mortgage's Walsh.
"Raising the conforming loan limit to $729,750 nationwide would spur home sales and allow many jumbo mortgage holders to refinance into the historically low rates that are currently available," Walsh said.
He added, "If I'm going to apply the same underwriting guidelines, appraisal standards, credit standards and down-payment standards, why shouldn't I be able to do these loans across the country? It would definitely spur the purchase market -- and it would spur the refinance market as well."
Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade," has been ranked as a top-selling real estate investment book for the Amazon Kindle e-reader.
|Contact Steve Bergsman:|
|Letter to the Editor|