Update: FHFA announced they would not change conforming loan limits in 2014.
More mortgages are underwritten to Fannie Mae and Freddie Mac guidelines than any home loan product in the market today. In fact, not only do they own more than half of the $10 trillion in outstanding mortgage debt but nearly three out of every four mortgages originated today are underwritten by mortgage lenders to these two mortgage giant’s guidelines.
Conventional Loan Limits
These mortgage loans have various requirements that must be met before they’re eligible for the secondary market. One of these requirements is the maximum loan limit, set at $417,000, and higher in certain areas deemed “high cost” areas. Any loan amount beyond that limit is then declared “jumbo” and subject to higher rates and additional down payment requirements.
At the height of the financial crisis, Fannie and Freddie were near the brink of complete collapse. Operating as privately held companies yet with the “government sponsored enterprise” status, Fannie and Freddie operated independently from the federal government. Yet they were in danger of closing down entirely, completely shuttering the secondary markets. In 2008, the federal government at the urging of then Treasury Secretary Henry Paulson, bailed out both and pulled them back from the precipice.
The taxpayer funded bailout has cost so far $188 billion dollars. And how to deal with Fannie and Freddie is a hot topic among private investors and politicians alike. The concern? How to keep Fannie and Freddie afloat while avoiding any further taxpayer intervention.
One of the prime factors in the mortgage market meltdown involved the relaxation of credit standards. While mortgage programs called “subprime” and “alternative” have always been a part of the mortgage lending landscape for decades in some fashion, the 2000’s saw such mortgage products taking more and more market share. So much so that Fannie and Freddie decided to play the same game and produced mortgage programs designed to compete with the subprime players and regain lost share. When Fannie and Freddie were taken over by the government and the housing market crashed, lending guidelines tightened and tightened with fervor.
In attempts to shore up their financials and get the housing market back on a more solid footing, mortgage approvals used traditional methods and fewer and fewer borrowers could get financing. The see-saw effect went from “anyone can get a mortgage” to “no one can get a mortgage.”
While “no one” is not exactly correct, it seemed that way for many. All to course-correct the mortgage lending environment and solidify the secondary markets.
New Limits at $400,000?
Loan limits have been left unchecked for years. And there are rumblings from politicians as well as the Federal Housing Finance Agency to reduce further risk to taxpayers by lowering the loan limits from $417,000. How much lower?
At this stage of discussion, there’s no definite number. But the general consensus seems to be that if there is indeed a cut in the loan limit, the limits will drop to $400,000 and to $600,000 in high cost areas perhaps around mid-2014.
This risk reduction is experiencing push-back from real estate agents, builders and mortgage companies who say that it will hamper the housing market, pushing up interest rates and making it more difficult to qualify.
The immediate impact is obvious, for those who are purchasing a house and financing more than $400,000 and less than $417,000, with the new limits in place, the borrowers will have to accept higher rates from a jumbo loan or provide more money down at the closing table. Borrowers who refinance a loan between $400,000 and $417,000 will also have some serious choices to make.
So far the back and forth indicates a willingness to listen to the various trade groups who oppose any decrease as well as certain politicians who claim it’s a service to their constituents by shielding the taxpayer from any future bailouts.
Regardless of when or how much, the loan reduction limit appears to have some serious legs. If you’re in the market for a home loan and these limits affect you, you may want to move your schedule up to avoid any price or rate increase.