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.
Thanks,
Kelly
[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.]
The update from Kelly:
As we reported earlier, President Bush signed the Economic Stimulus package that includes a raise in conforming loan limits for high cost areas, which includes the Bay Area. Since then there have been a storm of rumors about what this will mean for individual borrowers in terms of loan type and the cost and rates of loans going up to $729,750. Believe me when I say it is all rumors for now. There is no doubt that many people in the Bay Area will benefit from this news, but there is no way to know exactly how yet. We also have to remember that this window of opportunity is, for now, only going to be open until December of this year.
PURCHASE: If you are in the process of buying a property or about to be, hopefully, you are working with a mortgage professional that is on top of your file. Your loan file has to be in tip top shape and ready for approval. This means that if there are any lingering documents or issues that need to be dealt with, get them done and to your loan person right away. Make sure you and your loan file are in a position to take advantage of whatever becomes available over the next 30 days. Experts in the industry are expecting the changes to take place between St. Patrick’s Day (March 17) and March 31. It could be sooner, however.
REFINANCE: Don’t be blinded by rate! My best advice is to get a mortgage analysis from a professional as soon as possible. This should be a face to face meeting. Bring your financial information, current mortgage coupon and the Note, if you can put your hands on it. The important questions are “How long do you plan to keep the property?” “Are there any big job or income changes coming up in the next 3 – 5 years?” These questions are important, because loans cost money and to spend that money, it has to make sense. You really need a trusted professional to work the numbers for you and be prepared to take advantage of whatever opportunity comes out of this new legislation.
THE FORECAST: Generally speaking, when we are in a troubled economy, interest rates will benefit. Right now, that is true. We can expect the level of interest rates that we have right now to last through the summer, with some mild ups and downs. I do not expect that the rates will go crazy low like they did the week of January 24. We were locking in loans of a 30 year fixed at 4.875, which was crazy, but literally that window was only open for a few hours. If that kind of window opens again the only way you can take advantage of it is to have your loan package complete, in the system and are working with a mortgage professional who knows when to pull the trigger and lock. This is true whether you are refinancing or buying.
I would also like to say that if you have been on the fence on whether to buy a piece of real estate, there could not be a better and more exciting time. Reach out to the professionals who can help you figure this out and remember the only things we regret in life are the things we didn’t do.
great posts!
Goodposts indeed. Surprised the Jan YoY change was only -0.8% in SF. You’d think the median would be down more like 20% with a 65% drop in Jumbo Loans vs mid teens for conforming. Thoughts?
i just got a cold call from my existing mortgage bank. i told them to call me back when they know what the new conforming limit will do for a refi.
Kelly,
As a Sacramento area mortgage broker, I truly hope your market gets “tazed” into action by the new conforming loan limits. Historically, our upper end market is fueled by equity-rich transplants from the Bay Area fleeing to more reasonable prices and better QoL (Quality of Life).
Your mostly-jumbo market has been locked up by high jumbo rates. Now all my clients with home to sell in the SF Bay Area might actually find buyers and be able to complete their purchases here. And heck, with Sacramento prices in the tank, they can buy a home here and one in Tahoe!
Since the higher conforming rates depend on median price of homes, it sounds like some Bay Area counties will get excluded. (I expect many people in SF will be happy, but others in the outlying areas will be pretty bummed.)
P28 – You are wrong, as the conforming limit still goes to around $625,000 for the entire nation. It’s a great thing, that’s going to save hundreds of thousands of people A LOT of money.
Thanks, for your comment, Marc. Will the $477K help at all in Sacramento? I would think that amount for the FHA loans would help, though. I have been getting lined up for FHA certification, I never had to consider it before. This will all be interesting as it all unfolds.
On, the median limits and areas, HUD has 30 days from Wednesday to make official determinations about the median prices and therefore the new loan limits. The unofficial determination is done by using MSA/s Meteropolitan Statistical Areas, which isn’t necessarily done by counties, but looks like this:
To the limit of $729,750
36084 – Oakland, Fremont, Hayward
41884 – San Francisco, San Mateo, Redwood City (includes Marin)
41940 – San Jose, Sunnyvale, Santa Clara
the only one I found in the bay area was Napa, and they are limied to $709K
these figures take the median price from the area and add on 125% to get to the max loan limit.
kelly
I just read the Chronicle article on this issue and Carol Lloyd says that the new loan limits will take effect in July of 2008, that is not the same information that I have, but I am checking on it. Geez that was a smug article.
Boom, Kelly,
I hope you guys are right about the median limits and areas. Personally i would love to refinance, but i heard not all Bay Area counties will be applicable.
P28, that is not the information that I have. currently, the dilema is that we have historical interest rates on conforming AND jumbos right now. If the people involved in setting up the new programs keep fussing around with it and the rates continue to go up, the borrowers who waited, may not see the benefits that were intended. Feel free to contact me.
im in the processing of desperately needing to refi a 9% on 730,000. Im wanting to refi immediately but am wondering if i should wait it out for the new conforming limit to take effect. Any ideas on exactly when the conforming limit raise will take effect. I can only wait so long before I go bankrupt. help!!!!
[Editor’s note: If you’re serious, contact Kelly directly, [email protected].]
I am in Maryland and am about pull the trigger on a refinance. The amount of cash I need calls for a jumbo loan wich carries .5 point premium. I want enough money I will take out from the transaction to make a home improvement in additoin to paying off bills. I am considering taking $ 14K less than I need in order to remain conforming vs. going jumbo but this would negate the ability to do the home improvement. I am time constrained so I need to know how long this adjustment could take to reach my ability to take advantage and meet my goals. Any one have information I could use?
James – the .5 premium on 431K is $2,155, assuming you are talking about a fee instead of a hit to the interest rate, which is about $42 a month amortized over 30 years just for the cash out, That is pretty cheap money for your home improvements. The payment on a 30 year fixed for this loan amount is at 6.5 is $2,724 of that $42 would be for the cash. ( you don’t say what interest rate you have been quoted – this is a guess)
There are three 3 things to consider, 1) you have a known loan, interest rate and terms that will take care of what you need to, even if you go over the conforming loan amount. 2) You don’t know when or what type of premiums will be charged of the “conforming jumbo” loans (we have new terminology), There is no date set for the new loan terms, but it isn’t likely to be as soon as I had hoped. 3) interest rates are creeping up. So, you could opt to wait and see what happens and ultimately not have saved yourself much if anything, or you could get the cash you need (and if you are getting cash be sure you are getting all that you need), I am recommending to my clients in these situations to go ahead and close. I would not recommend that you do a refinance without taking out the cash, unless the deal puts you in a MUCH better situation with payment and loan terms.
Kelly
I was a the east bay CAMB legislative update meeting yesterday. It is becoming quite clear that there will be little if any impact with the raise in conforming loan limits. This news is disappointing to say the least. Fannie Mae is planning on charging a premium for loans over $417K, so what was the point?
kelly, are you saying that conforming loan limit is not increasing? I am in the process of buying a house for $500,000. I want to know if this increase is going to happend for sure, then how soon will it take place?
i take it you don’t have a down payment? when will folks learn? you should only be borrowing 400k max for that house. if you can’t afford the downpayment, keep renting till you can or borrow it from family, not the bank.
Do you know if this applies in the Chicago area? I live in a suburb of Chicago – a nice one – and I need to refi on an ARM but I am told that no one will touch us because it is a jumbo loan over 417k we owe 459,000.00 and have fair credit. Can we go nonstated or unstated on these deals?