Fannie, Freddie may cut loan limits, pushing borrowers to
By Kenneth R. Harney
Nov. 3, 2013
WASHINGTON – Should you be concerned that the maximum loan
amount you’ll be able to obtain through the biggest players in the mortgage
industry – Fannie Mae and Freddie Mac – might be cut sometime next spring?
Maybe you should.
That’s because mortgage applicants who no longer qualify under
the revised limits will be forced to shop in the so-called jumbo arena, where
minimum credit scores and financial reserve requirements tend to be tougher
and down payments heftier than in the conventional space dominated by Fannie
You might also have to settle for an adjustable-rate mortgage
rather than a fixed-rate one. Or you might end up in a situation where you
need a higher-rate “piggyback” second mortgage to afford the down
payment on the first mortgage deal you’re offered.
Here’s a quick overview of what could push eligible loan amounts
downward and what that may mean for thousands of buyers across the country
who abruptly find themselves in jumbo land.
At a meeting in Washington recently, Edward J. DeMarco, acting
director of the agency that oversees Fannie and Freddie in conservatorship,
said he was seriously considering reducing loan maximums as part of a
strategy to lessen federal involvement in the mortgage market. Though he
offered no specifics on dollar amounts, industry analysts say the maximum
Fannie-Freddie loan size could drop from the current $417,000 to $400,000 in
most parts of the country, and from $625,500 to $600,000 in designated
high-cost areas such as coastal California, metropolitan Washington, D.C.,
New York City and its suburbs, parts of New Jersey, Massachusetts, New
Hampshire, Colorado, Idaho, Wyoming and North Carolina. The decreased limits
could take effect as early as May.
Those decreases may not sound like much, but they’ll affect
large numbers of consumers who want to purchase homes with prices above the
average for their areas, especially newly built houses. Real estate and
lending groups are concerned that making mortgage money tougher to obtain –
pushing buyers into a segment of the market where Fannie and Freddie cannot
operate – is counterproductive in a housing economy still struggling to
recover from bust and recession.
There’s another, perhaps more important, problem here as well:
Reducing loan amounts next spring would complicate what is already shaping up
as a challenging lending environment for consumers in 2014, critics say.
Starting in January, new federal regulations that restrict
debt-to-income ratios and allowable total fees in “qualified”
mortgages will take effect and make significant numbers of applications
ineligible for Fannie-Freddie loan terms. Some industry estimates suggest
that as many as 1 in 5 borrowers this year would not pass the qualified
mortgage tests scheduled for next year.
Though DeMarco appears determined to lower the loan ceilings for
Fannie and Freddie, congressional critics contend that he lacks the statutory
authority to do so. A bipartisan group of 66 House members sent a letter to
DeMarco arguing that he is prohibited by “specific language” in an
economic stimulus law passed in 2008 from lowering the limits set by
Congress. DeMarco’s legal team disputes that interpretation.
The fight over Fannie-Freddie loan limits focuses fresh
attention on what could become a much more significant piece of the market:
jumbos. Because they are larger than conventional mortgages – ranging from
just above $417,000 to seven figures – jumbos traditionally have come with
extra costs and underwriting restrictions. Though jumbo interest rates now
average slightly above conventional rates, they often require stellar FICO
credit scores in the upper 700s, down payments of 20% or more and lots of
spare money in the bank. Fannie and Freddie loans, by contrast, are less
restrictive and allow down payments of 5% to 10% with mortgage insurance.
Some lenders are beginning to relax their jumbo terms, however,
and are offering smaller down payment options. Ted Rood, senior mortgage
consultant with Wintrust Mortgage in St. Louis, for example, said his firm
can do jumbos with down payments as low as 10% but at a slightly higher
interest rate than jumbos with 20% to 30% down.
Bottom line: If you’re thinking about buying a house with an
above-average price for your area next year, think jumbo mortgages. They may
be your main, or only, financing option.