New Mortgage Maximums to Come, Oct 2011
Loan regulations are constantly changing, but this time around the changes may potentially significantly effect values nationwide. Wall Street Journal outlined the upcoming changes, and I’ve highlighted the main points:
“Sellers Brace for New Mortgage Caps… October Change Is Meant to Reduce the Government Footprint in Housing, but Industry Fears It Could Lead to Lower Prices.” By Nick Timiraos & Alan Zibel (Link)
“The federal government is readying its first retreat from the mortgage market, with the size of loans eligible for government backing set to decline in October. As an emergency measure three years ago, Congress raised to as high as $729,750 the maximum loan amount that Fannie Mae, Freddie Mac and federal agencies could guarantee. That made it easier—and cheaper—for borrowers in pricey housing markets to obtain mortgages, because the government guarantees that investors receive payments on those mortgages even if homeowners default.
Now those limits are set to decline modestly in hundreds of counties across the U.S… as the government attempts to reduce its outsized footprint in the mortgage market and create room for private investors to compete. Government-related entities stand behind more than 9 of 10 new mortgages, and taxpayers have sunk $138 billion into Fannie and Freddie, underscoring the eagerness to dial down the government’s share.
The new limits will vary widely by location, but will drop to $625,500 in top-tier markets such as New York, Los Angeles and Washington, D.C. Even though the new limits won’t take effect until Oct. 1, some lenders are already warning borrowers that they will stop accepting applications for loans that exceed the new limits much sooner, to ensure the loans are funded before the cutoff date.
Had the lower limits been in place last year, Fannie and Freddie would have backed 50,000 fewer loans, according to the Federal Housing Finance Agency. The bulk of the affected loans —about 60%—are in California, with another 20% in Massachusetts, New York and New Jersey.
The possibility of lower loan limits is causing considerable anxiety in coastal California and other high-end housing markets that will serve as test cases for how the government’s withdrawal from housing will affect the market and local economies.
“Sellers are going to have to reduce their prices if borrowing costs rise,” said Scott Sheldon, a loan officer with First Cal Mortgage in Petaluma, Calif.
One of Mr. Sheldon’s clients, Ed Barr, has been pre-approved for a $662,000 loan backed by the FHA, the largest mortgage the agency can insure in Sonoma County, Calif. He is racing to close a sale before the limit drops to $520,950. Mr. Barr, who owns a wine-making machinery company, said he has excellent credit but a recent divorce left him with little cash for such a purchase. “I don’t have any other alternative,” the 48-year-old said. Without the loan backed by the FHA, which allows for down payments as low as 3.5%, “the sale won’t happen.”
Scaling back loan limits underscores a broader challenge facing the government: It wants more private players to hold mortgage risk, but it doesn’t want to destabilize fragile housing markets. Craig Van Sant is looking to pay $500,000 for a home with a $20,000 down payment in Rancho Cucamonga, Calif. Once the FHA limit drops to $335,000, he would need to more than double his down payment. The only upside, he said, is that “home values slide even more, allowing us to buy more house, if we can pull together all the cash.”
Source & Full Article at: WSJ.com