Provided by Russ Schreier, Director of Sales, Samuel Scott Financial Group
Fannie Mae loan limits for high-balance mortgage loans are scheduled to expire on September 30, 2011. Barring congressional actions, the “temporary” loan limits now in place will expire on that date and loans with mortgage note dates on or after October 1, 2011 will be subject to the “permanent” limits. Many of our clients and agents have questions regarding the expiration. The following are some of the most frequently asked questions.
Are the loan limits definitely expiring? What would it take for them to get extended or changed from the permanent loan limits?
Congress would have to take action to extend or revise the temporary loan limits, which were originally put in place through the Economic Stimulus Act of 2008 and have been extended through a series of additional legislative actions to provide support to the mortgage market during the U.S. housing crisis. The most recent extension for Fiscal Year (FY) 2011 occurred last fall under a continuing resolution. The February report to Congress by the Departments of Treasury and Housing and Urban Development (HUD) stated “the Administration recommends that Congress allow the temporary increase in limits that was approved in 2008 to expire as scheduled on October 1, 2011 and revert to the limits established under HERA [Housing and Economic Recovery Act].” As such, Fannie Mae does not expect any further extensions.
What will happen in 2012? Could the permanent loan limits go down?
As a result of the permanent authority for HCA loan limits established under HERA, the Federal Housing Finance Agency (FHFA) is required to evaluate loan limits annually, and revise limits accordingly. The first set of HERA loan limits (a.k.a. “permanent” loan limits) was established for calendar year 2009 based on the median home prices for the HCA Metropolitan Statistical Areas (MSAs) provided by the Federal Housing Administration (FHA)/HUD. While there have been median home price declines over the past three years, FHFA followed a policy to “not permit declines relative to the prior HERA limits.”
Several months ago, FHFA and Fannie Mae published the permanent loan limits applicable to loans originated on or after October 1, 2011, and which are acquired by Fannie Mae in 2011. Therefore, no changes are expected to those permanent limits between October 1, 2011, and December 31, 2011. FHFA has not indicated whether it will continue its policy of not permitting declines in HERA-based limits beyond 2011. If FHFA does not maintain its policy of not permitting declines in the HERA-based HCA loan limits, 2012 loan limits could decline from those that will apply in the fourth quarter of 2011.
FHFA has not yet published the HERA-based limits applicable to loans Fannie Mae will acquire in 2012, nor has it indicated when it will do so. However, standard practice has been for FHFA to release the upcoming year’s limits in mid-November each year.
Are you expecting any eligibility and pricing changes related to this expiration?
None is expected at this time.
How many borrowers are affected by the expiration of the temporary limits?
According to Fannie Mae a relatively small number of borrowers needing to finance loans are in the affected range. Certain markets will be significantly affected. Data gathered by the FHFA on acquisitions of these loans by the government-sponsored enterprises (GSEs) in 2010 showed significant clustering of the larger-balance mortgages in California and a small number in other states. According to the FHFA data, roughly 6 out of 10 of loans originated with loan amounts above the permanent limits but meeting the temporary limits came from California. Massachusetts, New York, and New Jersey collectively accounted for a further 20 percent. Twenty-six U.S. states had no purchase by the GSEs of the higher-balance loans.
The expiration of the temporary loan limits will certainly affect the interest rates a borrower will pay on a loan over $417,000. The current spread between a Fannie Mae 30 year fixed and a Jumbo 30 year fixed is around .6%. In the summer of 2008 the average spread was .2%. This spread is likely to narrow over time as credit conditions improve. The most important factor will be the expansion of jumbo product into the market place which we will cover in our next post.
The expiration of high balance loan limits coupled with the historically low and artificially deflated interest rates all point to this being one of the best opportunities to purchase or refinance a home.
