Higher Loan Limits Have Steep Costs
I’m not sure what the right word is…irony…stupidity, but Congress’ action to help the housing market may actually hurt it.
What am I talking about? The higher temporary loan limits passed in the stimulus package. We’ve wondered for some time what the true cost to these higher limits would be and this week we got more answers.
I reported last week that conforming jumbo rates would increase .25% for fixed rate loans, while ARMs would see a .75% hit to rate. This week, we’ve learned FHA’s increased loan limits would see a 2.5% hit to price. That’s a pretty big hit to absorb at one time.
I’ll go into some further detail of the implications of this higher pricing in a future post, but my gut reaction is higher loan limits won’t help as much as Congress originally hoped or intended.
Thinking about this over the past week has led me to come to the following conclusions:
1. Borrowers on the cutting edge for a refinance, that don’t have much equity, won’t see help from higher limits.
2. Borrowers in high cost areas, with equity, will benefit.
3. Buyers in high cost areas will probably benefit, if they can get their hits rolled into their loans from seller concessions.
4. There is no benefit to buying a more expensive house because of the increased loan limits.
Many people in the real estate industry, myself included, felt loan limits were hampering sales. Now that loan limits have increased and the risk premium is priced in, it seems to me that increasing them will not have that much benefit overall.
The previous spread between conforming and jumbo was between .5% to 1% to rate. With the new hits for loan amount, credit score, loan to value and adverse market, the new jumbo conforming loan is much more expensive than the old jumbo.
However, wider FHA loan limits will probably help many troubled homeowners because of wider credit acceptance and the fact the hit of 2.5% is to price (i.e. a flat fee).
When these limits expire at the end of the year, I suspect limits will return to their previous levels. In the mean time, there will be a rush on FHA refinances in the most troubled real estate markets.