by Kelly McCray
H.R. 5140, the economic stimulus plan, was signed into law by President Bush, among other things; the bill raises conforming loan limits for the Bay Area. The Bay Area for years has had no help, we pay premiums for our real estate, and we have, for so long, been subject to the AMT (alternate minimum tax) and the scorn of the rest of the country that we deserved it. Finally, Speaker Pelosi was able to broker something that will really give us some relief.
Conforming loan limit for Bay Area, yesterday – $417,000
Conforming loan limit for Bay Area in 30 days – $729,750
Coincidently, today was CAMB (California Association of Mortgage Brokers), SF Peninsula Chapter’s trade show. I went to mingle with people who I hoped would be able to shed some light on what this really means, turns out it is just too soon to know. But we are working hard on it.
Why does it matter? After all the loan approval process is complete and it’s time to have money at escrow, let’s just say it comes from a lender. The lender has sent money to the title company, usually from a line of credit that the lender holds, the lender wants that money back as soon as possible by selling the loan on Wall Street, so they can pay back the line of credit and then fund more loans. Fannie Mae and Freddie Mac are the middle people, their job is to buy the loans from the lender and then THEY sell it on Wall Street as a mortgage backed security. If they can’t sell it, tough, they (Fannie & Freddie) have to hold it.
Until today, with some exceptions, the loan limits that Fannie Mae and Freddie Mac were restricted to were $417,000 for the Bay Area as well as Detroit. So, if the lender made a loan yesterday for $600,000 and couldn’t sell it on Wall Street, today they could count on Fannie to buy it. See, now they want to make more loans for the higher loan limits. With this new legislation, Fannie Mae and Freddie Mac will be able to increase that loan limit in high cost areas like the Bay Area to $729,750. So, the lender who makes loans up to $729,750 can do so knowing that Fannie will buy it. They don’t have the risk of having the big loan sitting on their books.
What should happen is that loans up to $729,750 will be able to step into the shoes and types of loans that the little loans were in yesterday. Which means:
- 3% down payments, Fannie Mae loans allow for lower down payments
- an automated underwriting system that has a formula that looks at the entire borrower profile – this computer program takes all information, a persons depth of credit, time in their career, amount of assets and produces an approval. The way we are currently doing jumbos is that there is a list of guidelines – i.e. 6 months reserves, a FICO score of 720, two years in their line of work. Without one of those we can’t get an approval, with the automated underwriting we might, because the program takes into consideration that one item might be strong enough to compensate for a weaker item.
- The lower loan amounts were enjoying rates that are hovering around the high 5%’s today for 30 year fixed, the bigger loans are in the high 6%’s.
For my beloved Bay Area homeowners this could be great relief. But the industry just doesn’t know what to expect. This will become clearer in the coming days.
What should you do? Check back to this site soon and we will have more information.
[Update: Kelly just updated us, and we posted it here in the comments. She's pretty good about responding in the comments, so if you have questions don't be shy.]