LEGAL NOTES

When most people think of the Economic Stimulus plan of 2008, they think of the rebate checks that are coming in this month, but the change in loan limits for the Federal Housing Administration (FHA) and traditional "conforming" loans is expected to do even more to help alleviate America’s slowing economy.

Congress has implemented a program designed to help buyers qualify for bigger loans and help owners to refinance large mortgages into fixed-rate loans. The question is: can this work?

Congress has temporarily raised the conforming loan limit—the point at which a loan becomes a jumbo loan—to 125 percent of each county's median home price with a maximum of $729,750. For example, in Danville, IL, the limit will stay at $417,000 because 125 percent of the median home price is less than $417,000. In Danville, CA, the loan will be supported up to $729,750 because the median home price exceeds $417,000. The expanded loan limits include 244 counties in 28 states.

What does this change mean for homebuyers and lenders? Basically, there are now three loan sizes, but it’s a little more complicated than small, medium and large. The first type of loan is a conforming loan, which is a traditional FHA-insured mortgage that includes any loan under $417,000. The second type of loan is a jumbo loan, which includes any FHA-insured loan that is over $417,000 in counties that have lower median home prices, or over $729,750 in counties that have higher median home prices.

The third type of loan is referred to as a new jumbo or agency jumbo. Depending on the location of the property you want to buy or refinance, loans are being offered by Fannie Mae and Freddie Mac up to $729,750, but these require down payments of at least 10 percent (as opposed to the regular jumbo loans, which require as little as three percent).

This move is expected to help buyers in expensive areas qualify for loans, as well as to assist owners in these areas who are looking to refinance into fixed-rate loans. Since FHA loans offer 30-year fixed-rate mortgages, homeowners will be able lower their monthly payment on large mortgages and avoid the risks associated with subprime mortgage products that have fueled the foreclosure crisis over the past few years.

However, even with these increased limits, many aspiring homeowners are still being shut out by the legalese on these loans. For example, restrictions prevent homeowners from refinancing if they take out more than five percent of their equity, or from consolidating two mortgages into one. In addition, buyers in areas where prices are declining, like California and Nevada, are required to come up with larger down payments.

Another problem is that, despite Congress’ efforts to lower jumbo loan rates, many banks are still reluctant to lower rates. Ultimately, banks need to sell these loans to investors, but investors are shying away from mortgage-backed securities.

A recent twist may help turn things around. Freddie Mac announced that it would buy jumbo loans from banks as an investor, in an attempt to help boost loan originations. Freddie Mac said it would buy as much as $15 billion of these loans from four lenders, including Citibank and Wells Fargo. This may help more homebuyers in expensive regions qualify for loans.

The bottom line with these jumbo loan changes is that they provide a significant savings to anyone who qualifies, as the interest rates for large loans will likely be somewhat lower than what was offered last year.

Still, for all loan types, the mortgage industry’s lending criteria are leaning toward the conservative side, which many people believe is a long overdue change. After all, few can argue that the current foreclosure crisis in America is the result of loose lending practices and subprime loans.

Today, anyone applying for a mortgage faces similar lending criteria to what existed 10 years ago. They need to have a decent down payment, proof of their ability to pay bills on time, and proof that they earn enough money to make their payments. Unfortunately, this traditional underwriting practice excludes certain borrowers even if they are financially stable. For example, self-employed people and people who are paid on varying commissions rely heavily on stated-income loans, which are now a relic of the past.
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These expanded loan limits are currently only guaranteed through December 31, 2008. To keep the changes in effect, Congress will have to extend the expiration date—a move that many believe is likely.

Disclaimer: The above is not intended to be, nor is it legal advice, and should not be relied upon for any reason. Even though this article maybe disseminated throughout the U.S., the material covers only Nevada law, and no other. E RealEstateExec and Exec MediaGroup, LLC expresses no opinion on any other state's law, nor about the handling of any particular legal situation. You should consult your attorney, accountant or business advisor before undertaking any action. No attorney-client relationship is created between E RealEstateExec, Exec MediaGroup, LLC and the reader.