Now that I have your attention…. In a normal economy, most people who sell their houses (with the exception of those relocating for lifestyle or career reasons) plan to move up to bigger, better, or more centrally-located properties. In today’s market, however, the absence of available financing, especially jumbo loans, has virtually wiped out the move-up market.
A few banks have tried to fill the void with portfolio ARMs. These are adjustable rate mortgages, fixed for 3, 5,7 or 10 years, which are funded by the banks’ money and remain part of their portfolios. Portfolio ARMs are helpful to borrowers but insufficient to fill the demand for loans.
From out of the wilderness come the lenders calling for Fannie Mae and Freddie Mac to raise the limits on the loans they buy, a.k.a. “conforming loan limits”. Raising the limits on conforming loans would breathe new life into the move-up market. The current limit for a conforming loan in the lower 48 states is $417,000, except for certain high priced areas where it is $625,500. The loan limit for Alaska and Hawaii is 50% higher, or $625,000. I’ve been to both states in recent years and see no reason for the discrepancy.
In 2007, lenders called for Fannie and Freddie to increase their loan limits to match those in Alaska and Hawaii. It appeared to be a fait accompli, but Congress instead authorized a temporary increase in the conforming loan limits for single-family residences in just a handful of states. Within these states, loan limits were raised to $729,750 in a few select areas, but to $500,000 or even less in others. Texas and Minnesota, among many other states, weren’t granted any conforming jumbos. Having a committee determine the loan limits for an area based on rules decided by quasi-government organizations -- Fannie Mae and Freddie Mac-- doesn't make sense. Just because an area is granted a limit of $729,750 doesn't mean that every borrower and every property gets that limit.
Loan to value of the property is still determinant. So why exclude some properties or areas? As an example, Fannie Mae and Freddie Mac assign a different loan limits to each of three upscale California cities, Santa Barbara, Beverly Hills, and La Jolla. The common denominator is that most of us couldn't afford a house in any one of them anyway.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.