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Money Talks: Expanded Conforming — Higher Loan Limits Set to Expire Soon

January 9, 2012

Many borrowers may not be aware the expanded loan limits that have been around for the past two and a half years will expire Sept. 30 of this year unless Congress acts to extend them again. Congress has already extended these limits twice and it does not appear they will extend again, but you never know...

Let me back up a bit.

Today, there are three conventional loan categories. FHA also has expanded loan limits that are set to expire as well, however, I will address those at another time.

Regular Conforming

The first one is what I call the “regular” conforming loan limit. These are loans that “conform” to the standards of Fannie Mae and Freddie Mac. The limit can change every year based on national medium home values.

The current conforming loan limit is and has been $417,000 for several years. If it were not for the government keeping the limits the same during this current economic downturn, this limit would have dropped over the past several years as the medium home price has fallen. These loans are sold to Fannie Mae and Freddie Mac.

Expanded Conforming

The next category was created as a result of the financial and mortgage meltdown in 2008 and part of the Home Economic Recovery Act (HERA).

The category had a temporary limit known as jumbo conforming or high balance conforming loans. The loan limits reach as high as $729,750 for high cost areas and the limit depends on the median home price for each county throughout the country. Again, these loans are sold to Fannie Mae or Freddie Mac.

Jumbo or Non-Conforming

The third category is the Jumbo or Non-Conforming loan limit with loan limits ranging from $417,001 to $2,000,000 and up. These loans were sold to investment banks or held in the portfolio of a bank and do not necessarily have to “conform” to any particular guidelines other than that of the investor buying these loans.

Prior to 2008, the two conventional loans available were the conforming and non-conforming loans. After the financial meltdown, the government passed the HERA amongst other bills to prevent further financial meltdown.

This provided a temporary increase to the conforming loan limits after the collapse of the secondary mortgage market for jumbo or non-conforming loans.

The traditional investors in this (jumbo loan) market either vaporized or retreated and there was no longer an outlet for jumbo loans.

As a result, jumbo loan rates spiked to nearly ten percent because the only sources with enough money of their own to lend were banks.

However, the banks were not sure where the financial situation was headed and did not want to lend their own money and risk their liquidity.

In effect, the only investors purchasing home mortgage loans were Fannie Mae and Freddie Mac as they had the support of the federal government.

Eventually, (and for now) they were “saved “ by being taken over by the government and are still providing mortgage money today.

Since there wasn’t an outlet for Jumbo loans the government came up with this temporary program to fill the gap and to try and stabilize the residential housing and mortgage markets.

The program was originally set to expire Dec. 31, 2009, with the expectation the economy and housing markets would recover by that time.

As we all now know, that did not happen.

It was extended until December 2010 and again to Sept. 30, 2011.

During the past year, many banks have begun to lend their own money (portfolio) for jumbo loans and the pricing for these loans has dropped to historic spread of about one half percent over the conforming loan rate.

Therefore, the need for the temporary limits had diminished somewhat when it comes to pricing. However, jumbo loan underwriting criteria is stricter than the conforming loans.

This expanded middle category has been a huge boost to both those purchasing homes or refinancing in high cost areas, but it looks as if the program will end at the end of September.

Time is running out and we will see if the government extends these limits once again or lets them expire, so stay tuned.

In the meantime, mortgage interest rates hit historic lows (again) with all the recent volatility in the world financial markets. I would expect them to remain low for some time with, I am sure, a lot of volatility in between.

Whether you are looking to buy your vacation home or refinance your home don’t miss out of these low rates.

Happy Labor Day!

Doug Magit is a home mortgage consultant at Wells Fargo Home Mortgage, serving his clients nationwide for over 20 years. He can be reached locally at (760) 924-2270 or toll free nationwide at (800) 520-2050. Email him at douglas.magit@wellsfargo.com or visit www.wfhm.com/douglas-magit for more information. Information in this report is the personal view of writer and does not necessarily reflect the views of Wells Fargo Home Mortgage or the Mammoth Times.

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