Greg Cowart on Zillow
Greg Cowart - Mortgage Broker or Lender at The Securus Group
Greg Cowart - Roseville Loan Guy

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Maximum Loan Limits are going down (but that is OK)…

If you have heard about the coming expiration of temporary higher loan limits for FHA, VA, Fannie Mae, and Freddie Mac mortgages put into place in 2008 as an attempt to not let the housing market in higher priced areas fall off a cliff, you may have heard reports of doom and gloom for the housing market.  There have been numerous and varied contentions about the future state of the mortgage market once loan limits drop from the current maximum of $729,750 to $625,500.

The National Association of Homebuilders released a report saying it will be catastrophic however there isn’t really much to worry about for most American markets according to many economists and academics…

“As far as Fannie Mae and Freddie Mac are concerned, there is a tradeoff there between supporting the higher priced homes and weaning the housing finance system off of unusual limits it was put under during the crisis.” This is what Fed Chairman Ben Bernanke said to Congress this week. A study done by George Washington University suggested the same thing; the decrease in the maximum loan amount would raise the cost of borrowing for very few people (forcing them into JUMBO loans) and this world have no effect on most mortgage shoppers and a negligible effect on local housing markets.

FHA loans should see the same (lack of) change. According to the G.W. report “The FHA still could serve 95 percent of its historic targeted market even if the maximum FHA loan limit were reduced by nearly 50 percent” and “FHA’s expansion played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009. However, we now are left with large loan limits that were set when home prices at the top of the bubble. They don’t reflect current market conditions and are unlikely to assist the FHA in reaching its historical constituencies – first time, minority and low income homebuyers.”

“I understand the private sector is taking at least a significant number of the jumbo mortgage market but at a higher cost,” Bernanke also said.

Bernanke does admit that jumbo loans will come, “at a higher cost,” but we have to put in perspective what exactly that higher cost will be. Interest rates on mortgages today are already near historic lows at about 4.5% today and bond yields don’t look like they will be changing too much in the near future.

The bond market doesn’t seem to think the U.S. is really in danger of defaulting on its obligations, so rates should remain steady. If a jumbo rate is higher, even by a full percentage point, it’s still historically pretty low, and buyers looking at a higher-priced home likely expect to pay a higher interest rate already anyway. The jumbo market has always been like this, except before the temporarily loan amount increase the maximum loan amount was $417,000 (more than $200,000 less than the new lower amount will be) so in all reality no one, not even the homebuilders association, should complain.

-Greg

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