Seeding a New Sales Cycle

Higher loan limits expand lender options.

April 1, 2008

When President George W. Bush in mid-February signed into law a $150 billion federal economic stimulus package, he gave the lenders in Beth Peerce’s Southern California market something they’ve had trouble finding during the credit crunch: buyers for their big home loans.

The measure allows Fannie Mae and Freddie Mac to buy conforming loans up to 125 percent of the area median home price, capped at $729,750.

In Peerce’s San Fernando Valley market, the typical single-family home costs about $700,000, well above the former $417,000 loan limit that the two secondary mortgage market companies were authorized to buy under conforming loan guidelines prior to passage of the package.

The increase means that lenders in high-cost areas now will be able to make a single loan to many home buyers who before either had to take out a nonconforming jumbo loan, with its high down-payment requirement and costly interest-rate premium, or a “piggyback loan” package. Lenders have shied away from jumbo loans and piggyback packages as credit market conditions have worsened over the past year, contributing to the tightening of mortgage markets across the country.

Peerce, chair of the NATIONAL ASSOCIATION OF REALTORS®’ Conventional Finance and Lending Committee, says the higher limits should stimulate home buying — not just in her market but in all markets.

“Before, lenders would have to make a jumbo loan, even for just a typical buyer here, and they would never make that loan for just 5 percent down,” says Peerce, a sales associate with Carnahan & Assoc. in Beverly Hills, Calif. “Now, because it’ll be a conforming loan, lenders will make that loan on more advantageous terms.”

What’s more, says Peerce, the higher loan limits will open up desirable inventory for first-time buyers, because existing home owners will jump into the market.

“Now that home owners will be able to afford that move-up house, their current house becomes the perfect listing for first-time buyers — and more advantageous financing will be available for these younger buyers too, especially if they go with federally backed FHA loans.”

The loan-limit increase to $729,750 in the stimulus bill also applies to FHA loans, further opening up affordable financing options for home buyers.

Taken together, the new limits are expected to increase home sales by some 36,000 transactions a month, generating billions of dollars in economic activity, estimates NAR, which advocated strongly for the housing provisions in the stimulus package.

Quick Implementation

In a further benefit to home sales, both the federal government and the two secondary mortgage market companies are moving quickly to implement the higher limits. The U.S. Department of Housing and Urban Development in early March released its list of new area median home prices along with its new FHA loan limits, giving a quick start not only to the FHA portion of the increase but to the new conforming loan limits as well. That’s because the limits for Fannie Mae and Freddie Mac are based on the FHA limits.

In response to HUD’s quick action, Fannie Mae a day later announced it would start buying fixed-rate mortgages under the new limits April 1, and ARM mortgages May 1, even while it continues to work with its regulator, the Office of Federal Housing Enterprise Oversight, to develop underwriting standards that minimize financial risks with the new loans. Freddie Mac was also expected to move quickly.

For Peerce, quick implementation means a new day is dawning. “When the banks find they can make these loans and have a market for them, without having to worry, I think it’ll make a tremendous difference in home sales,” she says.

New FHA and Conforming Loan Limits (Selected Areas)

Under the Economic Stimulus Act of 2008, FHA and conforming loan limits are set at 125 percent of area median home prices, determined by HUD, although limits cannot rise above a maximum 175 percent of the previous conforming loan limit of $417,000. Thus, the outer loan limit is $729,750 (the “ceiling”). In areas where median home prices are under 65 percent of $417,000, the FHA limit will be at least $271,050 (the “floor”). For Fannie and Freddie (GSE) loans, though, the floor will be $417,000.

Area HUD Median Price Old FHA Limit New FHA Limit Old GSE Limit New GSE Limit
Boston (Suffolk County) $419,000 $362,790 $523,750 $417,000 $523,750
Chicago (Cook County) 328,000 275,200 410,000 417,000 417,000
Los Angeles 710,000 362,790 729,750 417,000 729,750
Miami (Dade County) 339,000 362,790 423,750 417,000 423,750
San Francisco 995,000 362,790 729,750 417,000 729,750
Washington D.C. 670,000 362,790 729,750 417,000 729,750

Source: NAR, using HUD data.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.