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For high-end buyers, the limits mean lower rates, and lower-end buyers will find it easier to get government-insured mortgages.
By LEW SICHELMAN
© St. Petersburg Times, published December 15, 2001
WASHINGTON -- Although mortgage rates have been inching higher of late, as many as 250,000 higher-end home buyers will benefit from lower rates beginning Jan. 1, thanks to the largest increase ever in the so-called "conforming loan limit."
At the same time, thousands more buyers at the other end of the price spectrum will find it easier to qualify for government-insured mortgages.
The new ceiling on home loans that can be purchased by Fannie Mae and Freddie Mac, the two government-chartered corporations that keep mortgage money flowing from investors to local lenders, will be $300,700. The current limit is $275,000.
At current rates, economists at Freddie Mac, a major supplier of mortgage funds, estimate that families whose loans fall within that $25,700 band will save as much as $37,000 over the life of a 30-year loan. That's about $103 a month.
The higher conventional limit isn't likely to produce many more buyers, because the vast majority of people who will benefit probably would have gone ahead with their purchases whether their loans were less expensive or not.
But it will "help buyers in high-cost areas and those who are at the margin," said David Lereah, chief economist for the National Association of Realtors.
"For much of America, $300,000 seems high," agreed Brad Blackwell, national sales manager for Wells Fargo Home Mortgage in San Francisco. "But for some areas, that's first-time home buyer level, and lower rates are a windfall."
In addition, a whole new crop of current owners whose loan balances are between this year's ceiling and next year's could find it beneficial to refinance.
The ceiling on mortgages backed by the Federal Housing Administration also will rise next year to about $261,600 in 38 high-cost areas. The FHA limit will be about $144,350 in most other places but could be somewhat higher in about 650 communities.
The current maximum in the Tampa Bay area is $132,000. The exact increase for this area has not been set. Lower-end borrowers will save no money because rates on FHA loans are no cheaper than conventional financing. But government financing is easier to obtain by borrowers who can't qualify for conventional financing, so more potential buyers will be eligible.
Next year's conforming loan limit represents a 9.4 percent increase over the current ceiling. It is the largest dollar increase ever, surpassing the $22,300 jump put into place this year.
The limit is the legal ceiling on mortgages that can be acquired from local lenders by Fannie Mae and Freddie Mac, two government-chartered corporations that bring liquidity to the mortgage market. About half of all conventional mortgages are purchased by the two enterprises and packaged into securities that are sold to investors worldwide.
Fannie and Freddie guarantee the timely payment of principal and interest to investors. But because of their government connection, and the safety that link represents, investors are usually willing to accept a somewhat lower yield. And that translates into lower rates for borrowers.
At the end of November, the difference in rates between conforming loans and "jumbo" loans -- which exceed the Fannie-Freddie limit -- was 0.36 percent, according to HSH Associates, a mortgage information firm in Butler, N.J. But the spread can be as great as 0.75 percent, depending on the lender.
Annual changes in the ceiling are based on the average price of houses nationally from one October to the next as calculated by the Federal Housing Finance Board. In October, the average rose to $219,600, a 9.36 percent increase from $200,800 a year earlier.
The FHA limit is set by law as a percentage of the Freddie Mac ceiling. It is 87 percent of the Freddie ceiling in expensive markets and 48 percent most everywhere else. Because the FHA calculates limits for 3,225 jurisdictions, an official announcement regarding higher loan limits, including in the Tampa Bay area, won't come for several more weeks. Fannie Mae, Freddie Mac and the FHA do not make loans directly to consumers. The government-sponsored enterprises act as middlemen to bring liquidity to the mortgage market, and the FHA insures loans made by private lenders to more risky borrowers who don't meet Fannie and Freddie's more stringent underwriting criteria.
Typically, FHA borrowers don't earn enough to qualify for a conventional loan, or they have too much debt. Their only other alternative is a so-called "subprime" loan, which often comes with rates that are 4 to 6 percentage points higher because of the greater risk these borrowers represent.
Other new conforming loan limits for 2002 are: $384,900 for two-family properties; $465,200 for three-unit dwellings; and $578,150 for four-unit buildings.
- Lew Sichelman is a syndicated housing columnist who lives in Maryland.