Will St. Patty's Day Bring Us Luck with Conforming Loan Limits?

By mid-March, HUD is required to publish what they determine to be median home prices which Fannie Mae and Freddie Mac will be using for what the temporary loan limits will be (125% of the median home price). I’m hopeful that Fannie, Freddie and banks are working dilingently NOW on what the guidelines and pricing will be for this new bracket of loans priced from $417,001 to the new temporary limit and that we’re not waiting after the loan limits are announced for lenders to figure out how they’re going to deal with the new loans.

I’m currently working with a couple who are looking at homes priced around $600,000. They could be perfect candidates for the new conforming loan limit. With 20% down, they will have a loan amount of $480,000. Here are a few scenarios I shared with them:

Structuring the mortgage as a jumbo compared to with a conforming first and second mortgage (heloc):


I am really favoring the 10 year ARM right now. Ten years is a heck of long time. Picture you and your life 10 years ago…and rhondawitt 1try to imagine your life 10 years from now. Mortgage planning is about selecting the right product that suits your long and short term financial pictures. If you select a 30 year fixed mortgage, yet you keep the home for less than 10 years, you may be losing hundreds of dollars every month. With that said, you cannot put a value on “peace of mind”. If you are going to lose sleep at night because you have an adjustable rate mortgage (that is fixed for ten years) then don’t do it. Go for the long term mortgage. Personally, I would lose sleep over not having the long term savings. It is a choice…YOUR choice. BTW…the photo of me might be closer to 13-14 years ago! 😉

Of course this couple could wait and see what the new loan limits may be…this plan has potential to backfire however. I’m hearing that the add to rate may be anywhere from 0.25% to 1.000% to rate for loans over $417,000. Worse case, the new conforming loan limit would still have rates where our jumbo rates currently are. Plus, we still don’t know what the new limits are. It’s highly speculated that our area will see the limit just shy of $500,000 (speculated being the key word). However if the add to rate is significant enough, then the new limit will make little difference to our current “jumbo” rates.

With the Fed meeting on March 18, 2008 and an anticipated 0.50% rate cut in the works, mortgage rates may very well be higher by that time . The Fed cutting rates typically causes mortgage bonds to react for the worse as it is an inflationary sign. It’s great for your HELOC, not so for your unlocked mortgage rate.

My advise is for my clients to proceed with an approval now. If the new conforming rate proves to be a better scenario for them while we’re in transaction, it’s easy for us to change plans (as long as we’re more than a week from closing).

56 thoughts on “Will St. Patty's Day Bring Us Luck with Conforming Loan Limits?

  1. Rhonda/Jillayne,

    Just spot this over CalcRisk:

    Twenty counties in California, including Los Angeles County and Orange County, are on the severely distressed markets list. At-risk markets around the country include 33 in Florida, 15 each in Michigan and Virginia, and 13 each in Maryland and Ohio. Many other states, including Arizona, Colorado, Connecticut, Louisiana, Massachusetts, Minnesota, New York, Nevada, New Jersey, Washington and Wisconsin had markets on the list.

    WA is on the distressed market list? Does it mean the entire state or just certain counties?

    Comments will be appreciated. Thanks.

  2. “The Fed cutting rates typically causes mortgage bonds to react for the worse as it is an inflationary sign. It’s great for your HELOC, not so for your unlocked mortgage rate.”

    From my experience, this needs to be said as loudly and as often as possible. Most people don’t seem to understand this at all. Thanks, Rhonda!

  3. Yang,
    I believe that it’s Pierce County that Wells Fargo has on their list, along with PMI mortgage insurance company. WaMU has all ready called most of WA State as “soft.

    If I find out more about Wells Fargo’s specific list, I will let you know.

  4. LHR, sometimes I feel like a broken record! 😉 I’ll keep repeating and I thank you for backing it up. I dread the period before the Fed meets and a reduction in rate is expected. Some consumers don’t believe it when you explain what the Fed rate cut does and does not do. Same thing with how volatile rates are. I’ll issue a rate quote and let them know that it’s good for now…they’ll go off and “shop” or call in a few days and that rate is either better, worse or the same. It’s all timing and the markets.

  5. Thanks, Rhonda.

    More questions and sorry if this is hijacks your post: are these LTV requirements applied at county level? Or are there different requirements for different cities within a county? If so, what’s the current WFC LTV requirements for east side cities, namely Bellevue, Redmond, and Kirkland? WFC probably has higher LTV than other lenders?

  6. Rhonda, this is a great example of why I disagree with the increased loan limits. Why should the GSE’s be helping people who can afford a $3,150/month mortgage? That means they should make $135k+ a year!

    The advice on the 10 year ARM seems solid. The challenge I’ve always seen is that some borrowers have to be firm about where they draw the line with themselves, their agent, and their LO. Let’s say they qualify for $550k with a 30 year fixed, and $600k with a 10 year I/O. Of course, the agent finds them a house they love at $650k and they’ve now talked themselves into a 3 year ARM negative amortization loan.

  7. laxtosnoco,

    this is the primary reason why I think agents should not be LO’s:

    “Let’s say they qualify for $550k with a 30 year fixed, and $600k with a 10 year I/O. Of course, the agent finds them a house they love at $650k and they’ve now talked themselves into a 3 year ARM negative amortization loan.”

    Even if they don’t put them in a undesirable mortgage…

  8. Great post Rhonda.

    I recently discovered a graph that shows pretty clearly that the recent fed rate cuts FOLLOWED the drop in the 30 yr fixed.

    Yang, most of the “soft” market restrictions that I have seen are at the county level.


    re the increased conforming limits.

    While I’m not wildly in favor of the whole stimulus package, and I do not think the increased limits will have much of an effect, it is equally unfair and unbalanced that only Alaska and Hawaii previously had this advantage, and not San Francisco or New York City.

    The investor market will probably wipe out any gains from the change anyways. It’s not like the GSE’s set rates.

    I’ve always been curious just how much the GSE’s are supported by taxpayer funding (for that matter, IF they are supported by taxes).

    Do you know?

  9. The GSEs, as far as I know, are private companies that are backed merely by the implied support of the federal government and taxpayer.

    We only pay if they need to be bailed out, which is why our allowing them to take on large amounts of new risk in what is already monstrously large companies is scary as all get-out.

    The Chairman of OFHEO, which regulates them, thinks it’s a pretty horrendously stupid idea, but he was overruled.

  10. Bili’s exactly right on Fannie and Freddie. No direct funding for the entities, but they benefit from the (implied) credit of the US government. FHA is obviously different because it is a government agency.

    I do worry that ugly loans are increasingly going FHA and/or through the GSEs because the subprime sources are gone. Increasing loan limits will increase this risk.

    For example, today I saw this gem on Craigslist: http://seattle.craigslist.org/sno/rfs/589360401.html

    “**FINANCING OFFER** I am a mortgage broker and am offering financing at 4.75% on an FHA 3/1 ARM (5.3% APR). I can do this because the loan will be done for free essentially, just to cover overhead costs. This FHA loan would need 3% down, and I can potentially structure that with you if interested. Condo is FHA approved.”

    The only way I can read this ad is that the seller is going to broker a loan on a property he’s selling. Tremendous idea, so why not use FHA?

  11. Thanks lax and bili.

    It’s why I keep comin’ back!

    At an FHA seminar I attended, the speaker said that FHA was not taxpayer funded either, being funded by the upfront and monthly mortgage insurance fees. They are pretty hefty, so it seems plausible. I wonder if they are re-insured, or entirely self insured?

    The condo ad looks legal, but it’s hard to draw any conclusions about correct APR and implied fees on an ARM.

    Love the irony.

  12. bili:

    Do the GSE’s insure or warranty the loans they purchase and sell to investors?

    Can’t recall hearing that before. Some facts go in, then right right back out.

    Regardless, I’m pretty sure the gov would step in to prevent a catastrophic collapse of the GSE’s or FHA, if it comes to that.

  13. Pingback: Will St. Patty’s Day Bring Us Luck with Conforming Loan Limits? | The Long List of Odysseus Medal Nominees | Realtors and real estate, mortgages, lending, investments

  14. Re: comments 1 & 4, I’ve seen the PDF of the list – and it is only Pierce County, Wa that is listed “at risk”. They show it as a “soft” market (versus “distressed”, or “severely distressed”) and the primary consideration seems to be they max out at 85% LTV for these markets (vs. I think 75% for distressed and IDK for severely distressed)

  15. laxtosnoco – ugly loans that qualify are returning to FHA that opted for subprime previously if the mortgage originator did not have FHA available and were too much of a hack to advise FHA. And sometime, the subprime products made more sense than FHA. We had both available (selective subprime) and it would be the consumers choice.

    FHA has always been credit history friendly vs. driven by credit score and designed to help first time home buyers with little down payment.

    So watch who you call ugly! 😉

    The craiglist ad is interesting…I would think the mortgage broker would be required to have his license number on the ad since he is in fact advertising.

  16. Yes, you can find some interesting pitches on CL. I’ve gotta believe advertising to do loans for “free essentially” is a RESPA violation and would probably run you afoul of the Washington State DFI too.

    I was more intrigued that it looks like he’s offering to broker the loan on a property HE owns.

  17. I just found a LO on the other side of the country who had reposted some of one of my articles on CL…it was weird. He was kind enough to remove it when I asked him to. I have never thought of “advertising” on craigslist. We have sold or gave away a few things with CL–it’s amazing!

  18. I should have asked in my post since it’s partially concerning the stimulus package: what are you planning to do with your refund? I’m betting most will pay a bill…but maybe I’m too boring!

  19. Thanks, Brian. 10 years ago I was managing a title and escrow branch in Southwest King County for a title company where I was the first people hired to launch it (Washington Title)…those were some fun days. Kind of like now!

  20. Rhonda–most responsible people will pay a bill, but remember there are a lot of irresponsible people out there who will do what the government wants them to do with it, which is to blow it on “stuff.”

    We’re spending ours on a trip to Japan, which I’m pretty sure is NOT what the government had in mind. Ha!

  21. St Patty’s Day luck to all those who wear green with some in there pockets. I think we will still need to have large downpayments for most loans.

    I like the comment above going to spend in Japan why not they come and spend in US. Maybe he should of given it to tourist they be sure to spend it and boost our economy many americans are paying credit card debt and taking vacataion out of US.

  22. We’ve decided last night that when we go our vacation this year, it will be in the states…maybe New York. Partly because of our weak dollar and also, we’d like to see Yankee Stadium before it’s gone.

  23. The current situtation is so tight…
    I am trying to buy a townhouse style condo in the bay area…with 10% down…excellent credit and enough income …(as per guidelines)..all is good on my side…

    but the banks are not ready to give loans for 90% LTV at a decent rate…. -:( I have been trying for almost 3 weeks now…..

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