by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
A conforming loan limit of $650,000 and an FHA loan limit of $729,000 are being telegraphed as part of the Economic Stimulus Package of 2008.
Inman News reports that Congress backed a temporary loan limit increase to $625,000:
The government-sponsored enterprises, or GSEs, may soon be allowed to back loans up to $625,000 nationwide and $700,000 or more in high-cost areas, according to published reports on the negotiations.
The Bush administration had previously tied any increase to the conforming loan limit to tighter regulatory oversight of Fannie and Freddie, where accounting scandals led both companies to fire top managers and restate several years of earnings.
Of course, that’s only the first step; the proposal has to work its way through the Senate and be signed by the President. While the common knowledge has been that President Bush won’t allow a GSE loan limit increase without greater regulatory oversight, mortgage insiders believe that he backed off that condition today.
The word inside the Beltway is that the deal has been fast-tracked for approval (by The Senate and President) under the following terms:
1- GSE (conforming) loan limits will be temporarily increased to $650,000 and remain in place until 12/31/2008. That means that states like California, Illinois, New York, Massachusetts, and New Jersey will get some much needed relief.
2- FHA loan limits, currently locked at $362,790, will be recalculated to 125% of the county’s median price, with a limit of $729,000. This is useful for states like California where the conforming loans are subject to LTV decreases due to declining market conditions. FHA loans aren’t subject to those blanket LTV guidelines. This loan limit hike is expected to be permanent, unlike the temporary GSE hike.
Nothing is rock-solid; it’s all rumor at this point. The Senate will play with the numbers but the Beltway Crowd says that President Bush has signaled the loan limits he will support, today. Expect this to be a reality sometime between Valentine’s Day and St. Patrick’s Day.
Why the sudden reversal from Bush?
It’s the economy, stupid.
Doug Quance says:
I can always count on you to stay on top of this stuff, Brian.
January 24, 2008 — 8:51 pm
VirtualChris-OC says:
What is the income requirement for a $650K mortgage (total PITI), and what percentage of people make that much money?
It seems futile to me. I don’t know who they think this will benefit.
January 24, 2008 — 9:29 pm
Brian Brady says:
“What is the income requirement for a $650K mortgage (total PITI)”
$150,000 annually, give or take $20,000. More importantly, the question should be: How much money can that save jumbo homeowners, at 7%? About $800/month; that’s two car payments.
“It seems futile to me. I don’t know who they think this will benefit.”
automakers, pool companies, the 401-k trustees, grocery stores, college bursars’ offices….pretty much the American economy.
January 24, 2008 — 9:59 pm
Kevin Boer says:
VirtualChris — Probably 50% of the households within 25 miles of where I sit have incomes at the $150K range. In high-priced areas like Silicon Valley and Manhattan, salaries of $150K are not uncommon — and trust me, you don’t live like a prince on that kind of money here. You’d have a higher standard of living earning $50K in Austin. Sometimes I wonder why so many flock out here!
January 24, 2008 — 10:28 pm
Brian Brady says:
“Sometimes I wonder why so many flock out here!”
for the $150k salary, but that’s a whole different discussion
January 24, 2008 — 10:58 pm
Greg Cremia says:
>Why the sudden reversal from Bush?
Maybe because the elections are on the horizon and this might be the first time in history that an American wartime economy is falling into recession?
January 25, 2008 — 6:46 am
VirtualChris-OC says:
While I’m not disputing that this increase will lower peoples payments, my argument is the total debt people are taking on is absurd. Yes, people can argue that ‘everyone’ makes that kind of money, or if the family is dual income, or whatever… What the general buying public does not understand, is that they are shortsighted, just like all the people that are loosing their homes right now…
They bet the farm on appreciation…
Yes, everyone wins in that game…Even the clerks working at Taco Bell or Walmart (if they lied, went stated, etc.) who bought…just hoping their 6 lucky lottery numbers come up…
This is not long term reality folks. The real reality is that you eventually get bit. Here is the deal. Not only do ‘prices always go up’, but dual income families don’t necessarily have dual income for the life of the loan.
Just for the record, I am a bubble sitter. I got lucky when my 6 numbers came up in 2005 and I sold. You can place me in the ‘JBR’ (just a bitter renter) category for now. But in the last 2 years that I have waited to jump back in, you should see how much more house I can get today. In 2 more years (when I am guessing I will buy), I will have leap frogged over many of my peers.
Cheers and godspeed.
January 25, 2008 — 7:21 am
Brian Brady says:
“my argument is the total debt people are taking on is absurd”
Yep.
“but dual income families don’t necessarily have dual income for the life of the loan”
Yep, again.
Let’s hope this opportunity allows people to clean up their personal balance sheet and get the economy moving. Chris, I’m biased because I originate in SoCal. It is close to impossible to fund a jumbo loan that makes any sense, right now.
January 25, 2008 — 7:57 am
Michael Cook says:
Just for the record, if you are making $150k in Manhattan, you are low to middle income. With studios (500 sq. ft.) going for well over $500k, this would be quite a boon to the New York City economy. Thanks for the info.
January 25, 2008 — 8:14 am
Robert Kerr says:
“… who will benefit?”
Automakers, pool companies, the 401-k trustees, grocery stores, college bursars’ offices….pretty much the American economy.
And what of the flip side: who now bears more risk?
With Fannie and Freddie reportedly sitting on $16B in about-to-be-reported Q4 losses, this layers more potential liability upon taxpayers.
And why? Fannie and Freddie were chartered to subsidize low-income, first-time buyers, but now they’re backing $700K loans?! That’s the top percentile.
Does this make sound like a good idea to anyone who doesn’t stand to make money from this change?
This is so wrong in so many ways.
January 25, 2008 — 3:10 pm
Brian Brady says:
“And what of the flip side: who now bears more risk?”
What risk, Robert? You make it sound like every loan is going to default.
Contrary to specific belief folks, American real estate is not bad collateral and the American home owner is not some Latin American dictator, borrowing money.
“but now they’re backing $700K loans?! That’s the top percentile.”
Not where I’m sitting, Robert.
January 25, 2008 — 3:36 pm
Robert Kerr says:
What risk, Robert? You make it sound like every loan is going to default.
C’mon, Brian, you know better. The reason jumbos are up at 7% while nons are down at 5.5% is because they’re turning bad, even prime jumbos are going sour.
No, not every one, of course not, but I’m positive that a fellow free market proponent appreciates why the private sector wants 30% more for jumbos and what that means to taxpayers who are now on the for that extra liability but not collecting the risk premium.
“but now they’re backing $700K loans?! That’s the top percentile.”
Not where I’m sitting, Robert.
Nationally, $706K is the 99th percentile.
January 25, 2008 — 4:42 pm
Brian Brady says:
“Nationally, $706K is the 99th percentile”
again, not where I’m sitting
January 25, 2008 — 5:14 pm
Rich Rosa says:
I guess the question is, even if a lender says you can afford a $650K mortgage on a $175K salary, do you you really want one?
January 26, 2008 — 3:52 pm
Brett says:
As long as the underwriters scrutinize these borrowers and only throw the life preserver out to those who are truly capable of repayment, then I think this is a good idea.
This much needed relief, will certainly be appreciated by those who took out Jumbo mortgages on ARM’s before the money dried up.
January 27, 2008 — 10:01 am
Mark says:
My house purchase price was $330K today its valued at $290K FHA is my only option but the max limits on an FHA loan in the county where i live in IL is $275K.
Will the increase in the limits enable me to refinance?
January 27, 2008 — 2:36 pm
Robert Kerr says:
Brett, jumbos didn’t dry up.
A qualified borrower can close on a conforming jumbo in 30 days, at 6.5%.
The market is assessing a 1% risk premium right now because jumbos have begun turning sour. Even prime, conforming jumbos have begun to turn.
This is not about availability, it’s about providing the jumbos at a reduced rate through GSEs and letting the taxpayers bear that risk.
This is insane.
Aside from those people who stand to gain financially from this change, I have yet to see ANYONE with a background in economics or markets say this is a good idea.
January 27, 2008 — 5:11 pm
Seth says:
Robert wrote:
“The market is assessing a 1% risk premium right now because jumbos have begun turning sour. Even prime, conforming jumbos have begun to turn.”
I’ve bought two houses in the last 5 years with a total note greater then $417K. Both times a jumbo was 1 – 1.5% higher then a conforming $417k loan. I took a primary note for 80% ($417k or less) and a second for 10%. This not only kept me out of jumbo rates but avoided PMI.
The risk premium for jumbos is there because Fannie & Freddie can’t buy them. It’s not because the default rate is higher then it is for conforming loans. Actually the 6.5% Robert quoted is less then a jumbo would have been two years ago when I bought my last house.
January 29, 2008 — 12:13 pm
Kevin Anderson says:
All loans are priced in terms of “risk”. Jumbo loans are still being sold on the secondary market, however at a greater price due to risk…therefore at a higher spread premium over conforming loan’s. Same scenario for home equity loans. I am in a “level 5” soft market (the worst)in Nevada. Just as of last week, Fnma and Fdmc initiated a loan to value reduction on all conventional loans to be reduced by 5%…period, refi or purchase. That means that traditionally a person that would put 5% down, now needs to put 10% down, or be at a 90% ltv on a refinance.
This does not affect FHA or VA loans…these will most certainly be a front runner on new loans.PMI is now 100% write off on taxes, if the household income is 100k or less…another incentive.
January 29, 2008 — 2:45 pm
rms says:
mark my words. if this goes thru the conforming rates will rise and the gap from jumbo to conforming will shrink. jumbos are at a premium to conforming rates now not because of more risk but because the banks have no investors for those jumbo loans as before, therefore most banks are portfolio’ing the jumbo loans and require/desire a premium as such.
February 2, 2008 — 12:31 am
Michael Tarabotto says:
Great topic, Brian. And you’re right, “it is the economy”. My thoughts are as follows.
The GSE’s have no business taking on larger loans at this stage in the game. Last August? Maybe. But even then, foreclosures – any insurers Kryptonite – had already picked up too much momentum. They’re barely meeting capital requirements now and will continue to struggle without raises. This move, coupled with the escalating tide of default filings in California, puts to the GSE’s at risk of insolvency.
My prediction is it won’t happen, and even if it does, 09’ limits well likely fall below the existing $417,000 since we’re already in the 1 year window from the 07’ FHFB house price report. I would venture further and say if legislators had a real plan and clear cut exit strategy (not one of their strengths) before enacting raises, I may be for it. But I would rely on the CBO’s analysis before favorably welcoming the increase.
February 2, 2008 — 9:09 am
Rick says:
I can understand how people that live in areas where the median salary is between $50-$80K think that raising the conforming loan limit is silly. But for those of us that live in NY City, California, Washington D.C., etc…. where the median house cost at least $500K, it makes perfect sense. It will at least give us a chance to buy a singel family home instead of a condo or townhouse.
February 4, 2008 — 9:07 am
Brian says:
I live in an area where the median salary range is between $35-$60 and I think it makes perfect sense. No matter how you slice the pie FHA loan limits are still to low verse median income. Our county lending limits are $225,000. It all is relative whether your in Salisbury or DC the numbers just don’t jive. Conforming FHA limits will satisfy many hardworking american needs.
February 4, 2008 — 9:56 pm
Sal says:
Is the 729,000 limit for the loan or the value of your home? Additionally, I dont understand why all of you are against this. If I can get my Jumbo loan to have a conforming loan rate, then how can that be bad?
February 7, 2008 — 2:38 pm
Kevin Anderson says:
The $729,00 would be the loan limit not the value. Do keep in mind that this is the maximum allowed and could be adjusted down based off of certain geographical areas.
February 7, 2008 — 3:46 pm
Nancy says:
I would like to know when this will pass and when I will be able to aply for a FHA LOAN??? Approximate date?
February 7, 2008 — 6:04 pm
kevin_d-anderson@countrywide.com says:
The word is that these wil be likely coming into fruition at the end of this month or early next month.
February 7, 2008 — 6:13 pm
Brian Brady says:
Paragraph #9, Nancy:
“Nothing is rock-solid; it’s all rumor at this point. The Senate will play with the numbers but the Beltway Crowd says that President Bush has signaled the loan limits he will support, today. Expect this to be a reality sometime between Valentine’s Day and St. Patrick’s Day.”
…which is what Kevin tels us, as well
February 7, 2008 — 6:19 pm
kevin_d_anderson@countrywide.com says:
I have had numerous people waiting for refinances/ purchases on the new loan amounts for both FHA and conforming programs.I think it will help alot of people out, especially on the conforming loan limits.
February 7, 2008 — 6:21 pm
Nancy says:
Thank You guys!!!
February 7, 2008 — 6:23 pm
R Sciacchi says:
Considering here in California, especially the Los Angeles area it is hard to find a condo for less than half a million. $417,000 isn’t realistic anymore. Not here at least.
Living in Los Angeles has totally distorted my concept of Money. A half a million dollars is still ALOT of money but it doesn’t get you much here.
February 8, 2008 — 9:56 am
Michael Tarabotto says:
R. – So true, but a half million dollars in cash is one thing, half million in credit is another. Yesterdays passage of HR 5140 (to be signed expeditiously by the president) will temporarily aid those with equity to refinance. Those without equity are hosed anyways, and that’s a large number due to the duration that affected price stratas went without viable finance options. From an investor standpoint, raising limits prolongs the artificial prices we’ve seen to date. I don’t see the benefit there. But perhaps if this raise shows promise, decision makers may decide to keep them indefinately…one could only hope for the best.
February 8, 2008 — 10:35 am
R Sciacchi says:
Michael,
So true indeed. Raising the limits very much validates and extends today’s ridiculous housing prices. So many homes were “Over Valued” upon appraisal to make the loan work which is one of the reasons (Not the only one of course) that we are in this mess today. Seems CW is going to start seeing some of the recourse from it’s actions. Karma.
Los Angeles, one of the rare places where you can you buy a $250,0000 dollar home for only a million dollars?
February 8, 2008 — 10:47 am
Jonathan says:
I haven’t heard anyone talking about the limits being raised on VA loans yet. Any opinions?
February 9, 2008 — 5:30 pm
Nikki says:
I think that increasing our current conforming loan amount is a great idea and will benefit many! With everything that has happened in the subprime market it has affected just about everyone. I hope this happens sooner than later!
Many people who need a stated income loan program are suffering from this due to nonconforming underwriting guidelines. I’m in Chicago and this is very much needed with the highrise condo market! It’s really a blessing to many!
February 10, 2008 — 2:17 am
Fitse says:
Is this limit specified by juridiction (state,county etc..?) If so what whould be the limit for Virginia?
Also, if they require 5 or 10% downpayment for refinancing as it’s been said, many of us may not be able to benefit from refin. into conforming loans. In addition, this is coming as the value of the houses is low meaning LTV will be higher!
I’m just confused!
February 13, 2008 — 2:55 pm
Mike says:
Will a homeowner with a 500k loan, equity in their property and an excellent credit rating be able to re-fi out of an interest only ARM into a 30yr fixed using stated income? If so, will needing to state income counter any potential savings? How will their monthly payments compare????
February 14, 2008 — 3:07 pm
Kevin Anderson says:
You can refinance out of an interest-only arm into a 30 yr P+I absolutely.In doing a stated income type loan, there will most likely be a margin add-on to the rate and have titghter restrictions on loan to value ( 75% max.)Of course this varies from one lender to another.
Ex. you could do a stated(reduced doc)type of loan with a 720 credit score and be @ 90% loan to value…today. I would however be cautious as loan program guidelines are changing rapidly and I encourage people to be aware that what is quoted to you one day, may not be available the next coming week.
February 14, 2008 — 4:10 pm
Brian Brady says:
The answer to your questions, Mike, is yes on both accounts. It is feasible and it will cost more money.
Why refinance from the I/O loan? You could save a lot of money by making the fully amortized payments on the existing loan.
Mike, many stated income borrowers were counseled into that option by lazy loan originators. Contact someone who knows how to read tax returns; stated income may not be necessary
February 14, 2008 — 6:17 pm
Kevin Anderson says:
Mike,I only suggest to people that an arm may be good for you if you are planning on staying in the home for a minimal period of time. If you want to get into a longer fixed loan, but may not want the payment shock, get into a 30 yr fixed interest-only. This will give you ten years int. only payments and then convert to a P+I payment, but at the same rate as when you initially started the loan. Make additional payments whenever you can towards pricipal andhave the ability to have some flex with your money when you need it.
February 14, 2008 — 7:09 pm
Brian says:
So what is the Fannie/Freddie conforming loan size limit for a single family property in Illinois? And is it by county or Illinois as a whole? Also, how is this determined? 125% above FHA’s loan limits? I appreciate the insight and help–thanks!
February 25, 2008 — 4:30 pm
Brian says:
So what is the conforming loan size limit on a single family property be in Illinois? And is it by county or Illinois as a whole? Also, how is this determined? 125% above FHA’s loan limits? I appreciate the insight and help!
February 25, 2008 — 4:34 pm
Atul Rastogi says:
this is a very informative blog site. I would recommend to anyone come and blog or read on it. The limits have not been passed to become public. Though President has signed the draft. When they will become active is not published. Mortgagedaily.com has said in early march. I am desperately waiting for it to come in force. there are several borrowers who will benefit from increased FHA limits whose house values have fallen below their current loan balances and rates are adjustable with PMI. You bet there are millions of those who became homeowners without proper means.
February 29, 2008 — 1:34 pm
Nancy says:
I would like to thank you all for the information you put out there for us. My question is if you will announce it here once it has been made public?
February 29, 2008 — 3:57 pm
Brian Brady says:
“My question is if you will announce it here once it has been made public?”
Not only will I announce it, I’ll fold, spindle, and mutilate the new limits, in analysis, ad nauseum.
Keep checking back, Nancy.
February 29, 2008 — 4:57 pm
Nancy says:
I look forawrd to it Brian! Thank You
February 29, 2008 — 5:15 pm
Nancy says:
I look forward to it Brian! Thank You
February 29, 2008 — 5:16 pm
Brian says:
Thanks for the update. You can however figure out the limits on your own if you do the math and research by reading through the enabling legislation/bill that is now law.
February 29, 2008 — 5:46 pm
Mohit Thapar says:
when the confoming limit will raise to 650 or 729.
Is there a date set for when it will increase or not.
March 3, 2008 — 1:19 pm
Atul Rastogi says:
Some time in Spring. Currently HUD is waiting for a report on median sales price. It may or may not be a universal (Around the Country)increase in limits.
March 4, 2008 — 12:28 pm
natasha says:
On talk radio this morning, it seems they were leaning towards mid summer before the limits officially raise. Is this correct?!!??
March 6, 2008 — 10:24 am
Allen says:
Ok so the FHA limits went in affect today? what and did the conforming loan amounts raise today as well?
March 6, 2008 — 11:40 am
David says:
If anyone sees a Recent Media Article, let me know. I have been told by both Countywide and Wells Fargo that they are offering Conforming up to $659K.
March 26, 2008 — 4:29 pm