|No mortgage limit reduction until at least Spring 2014
As of Oct. 24, acting director of the Federal Housing Finance Agency (FHFA) Ed DeMarco announced there would be no mortgage limit reduction until at least the spring of 2014. Industry changes support current conforming loan limits extending through the spring of 2014.
Here are the top three financial factors that support keeping limits at the status quo:
In January 2014, in accordance with Dodd Frank Act, “qualified mortgages” will be rolled out to the industry as the new way of origination home mortgages. Under the law, a qualified mortgage is a fixed-rate mortgage, with the debt to income ratio that does not exceed 43 percent of the consumer’s income. If the loan is an adjustable rate or the debt-to-income ratio exceeds 43 percent, the loan becomes a non-qualified mortgage. On either type, a consumer must provide full supporting financial documentation, along with acknowledgement income and employment analysis. Many of the loans being made now, including the conforming loans offered by Fannie and Freddie Mac, contain debt-to-income ratios of 45 percent, often with higher debt ratios. The change could have a lasting effect on the mortgage/housing sector overall and could take months, perhaps longer, to adjust to a new level of normalcy supporting current loan limits.
Credit-restricted and risk-based pricing isn’t going away. Risk-based pricing is a higher cost loan for a high-risk loan application. Until risk-based pricing is reduced, the loan limits are supported remaining at their present levels, $417,000 for loans – up to $520,950 in Sonoma County – for conforming high balance loans backed by Fannie and Freddie. An example of risk is the “adding” of an additional charge for securing the loan brought on by a lower credit score. Seeing a .625 percent discount point for a 680 credit score isn’t uncommon. On a $450,000 loan, that’s an additional $2,812 charge.
Risk-based pricing may have a reduction in time but only based upon more openly obtainable credit. Make no mistake, while in many markets foreclosures and short sales are far and few, housing is still not fully recovered as evidenced by the continual tightening of credit, especially in the mortgage arena.
The favorable news is that is the last of the limiting changes brought on by the need for stronger credit, meaning this is the first step in the broader picture to fully established housing sector.
Higher priced loans lead to decreased applications
Should the FHFA reduce the loan limits for Fannie Freddie loans, borrowers will be forced into higher-priced mortgages, a.k.a. jumbo loans, which contain…yep…higher rates, higher fees and higher credit scrutiny. Jumbo loans cost more because there’s a smaller pool of investors in the secondary market buying these securities because of the sheer nature of perceived risk of jumbo money brought out by the credit crisis a few years back. This has investors skittish on lending big loan amounts to less than stellar credit types. For example, securing a jumbo loan will require down payment of at least 20 percent.
Moreover, many jumbo lenders price .75-1 percent or more above market loans by Fannie or Freddie. There is the possibility, because of a reduction in loan limits, the jumbo investors will start to come back into the market and will aggressively price loans to capture the additional business, but time will tell.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.