As of October 24, acting director of the Federal Housing Finance Agency (FHFA) Ed DeMarco announced there would be no mortgage limit reduction til at least Spring 2014. Industry changes support current conforming loan limits extending through Spring 2014. How the data adds up..
Top 3 Financial Factors Support Keeping Loan Limits Status Quo
Qualified Mortgages
In January 2014, in accordance with Dodd Frank Act, ‘qualified mortgages’ will be rolled out to the industry as the new way of origination home mortgages. Under the law, a qualified mortgage is a fixed rate mortgage, with the debt to income ratio that does not exceed 43% of the consumer’s income. If the loan is an adjustable rate or the debt to income ratio exceeds 43%, loan becomes a non-qualified mortgage. On either type, a consumer must provide full supporting financial documentation, along with acknowledgement income and employment analysis. Many of the loans being made now including the conforming loans offered by Fannie and Freddie Mac contain debt to income ratios of 45% , often with higher debt ration. The change could have a lasting effect on the mortgage/housing sector overall and could take months, perhaps longer to adjust to a new level of normalcy, supporting current loan limits.
Housing Strength
Credit restricted and risk based pricing isn’t going away. Risk based pricing -higher cost loan for a high risk loan application. Until risk based pricing is reduced, the loan limits are supported remaining at their present levels, $417,000 for loans up to $520,950 in Sonoma County, CA for conforming high balance loans backed by Fannie and Freddie. An example of risk is the ‘adding’ of additional charge for securing the loan brought on by a lower credit score. Seeing a .625% discount point for a 680 credit score isn’t uncommon. On a $450,000, that’s an additional $2,812 charge.
Risk based pricing may have a reduction in time, but only based upon more openly obtainable credit. Make no mistake, while in many markets foreclosures and short sales are far and few, housing is still not fully recovered as evidenced by the continual tightening of credit especially in the mortgage arena. The favorable news is that is the last of the limiting changes brought on by the need for stronger credit, meaning this is the first step in the broader picture to fully established housing sector.
Higher Priced Loans Translate To Decreased Mortgage Applications
Should the FHFA reduce the loan limits for Fannie Freddie loans, borrowers will be forced into higher-priced mortgages a.k.a. Jumbo Loans which contain….yep…. higher rates and higher fees and higher credit scrutiny. Jumbo loans cost more because there’s a smaller pool of investors in the secondary market buying these securities due to the sheer nature of perceived risk of Jumbo money brought out by the credit crisis a few years back, has investors skittish on lending big loan amounts to less than stellar credit types. For example securing a Jumbo loan will require down payment of at least 20%. Moreover, many jumbo lenders price .75- 1% or more above market, loans by Fannie or Freddie. There is the possibility due to a reduction in loan limits the jumbo investors will start to come back into the market and will aggressively price loans to capture the additional business, but time will tell.
If you’re considering a home refinance, or purchasing property between now and January, start the process and complete your transaction prior to January 1. Not only will the transaction be made easier, but you can receive clarity on qualifying ability and a competitive interest rate with a local lender. Start today by getting a complementary mortgage rate quote!
