When will the new, higher conforming loan limit come into effect for US mortgages?

February 6, 2008 9:28 AM

When will the new, higher conforming loan limit come into effect for US mortgages?

Apparently the previous cap of $417K will go up based on the area's median home price. But when will lenders start making these loans? And what are the chances the bill won't pass?

posted by GuyZero to work & money (5 comments total)

It's in the general economic stimulus bill (H.R.5140). It's going to pass.

According to the House version of the bill, it applies to mortgages originating between July 2007 and December 2008. Since there's no effective date, it's whenever the bill passes.
posted by smackfu at 9:51 AM on February 6, 2008

As a followon, what would someone who wanted (say) a $450K mortgage in June do? Wait? Refinance after a month? Other than sucking up the extra point of interest.
posted by GuyZero at 10:47 AM on February 6, 2008

However, and someone will correct me if I am wrong, the bill also has to pass the Senate, and last I heard the Senate bill did not contain this provision. If it does not, then it will probably have to be worked out in committee. There is opposition to raising the limit from the Office of Federal Housing Enterprise Oversight to do so. You can read the report about why and some discussion at this post at Calculated Risk.

Additionally, just because the bill passes does not mean that the loans will be immediately available, or that the interest rate will be as low as a current conforming mortgage. Fannie Mae and Freddie Mae would be allowed but not required to buy the mortgages, and may not want to take on the risk or have the capital to do so. There is also higher risk in a larger loan, so the rates probably would be higher - perhaps not as high as a current jumbo loan, but more than a current conforming mortgage.

Finally, raising the conforming rate runs the risk of dragging the current conforming loan rate upwards. If the investors who buy the packages of loans from Freddie Mae and Fannie Mae have larger and riskier loans included in the pool they buy, they will charge a higher rate for the whole pool. This may not happen, and depends on how the larger loans are packaged and sold, but it is one of the risks of raising the limit - people under the current limit could end up paying more, in effect subsidizing those who have a newer mortgage (which generally means most of the US helping Californian).
posted by procrastination at 10:48 AM on February 6, 2008

As to a $450K mortgage, what is often done is to take out a loan at $417K to meet the conforming limit and lower interest rate, then to take a second mortgage or home equity loan to get the $33K difference. The second mortgage will be at a higher rate, probably by several percent, mostly because the second mortgage holder only gets what is left over after the first mortgage is paid in the event of a default and foreclosure, so their risk is higher. The benefit of this two-mortgage approach is to lower the effective overall rate of interest payments. You can then try and pay off the second loan more quickly, ending up with a single conforming mortgage.

As to if it is worth it to refinance, you would need to do some math to see. There are pretty significant costs involved, so that it is usually not worth it unless the rate has dropped by a full percentage point, but even that depends on how long you intend to be in the house.

For an alternative, consider renting. Seriously, it is likely to be way cheaper then buying. I know there is pressure to buy and "build equity" instead of "throwing away money" on rent, but most of the country is likely to experience declining prices over the next several years. Borrowing money to buy something that is likely to decline in value is a risk. if you want to know how big a risk, you can look at the housing futures market to get an estimate of how far values are expected to fall. You can look at one of the many rent or buy calculators online, and plug in some values to tell you what might be better in your situation.
posted by procrastination at 11:03 AM on February 6, 2008 [2 favorites]

Well, the Senate bill passed and the higher mortgage limits are in for particular areas. Good luck with the mortgage.
posted by procrastination at 2:33 PM on February 7, 2008