Raising the roof on conforming real estate loans

A plan to jumpstart homebuying

Steve Bergsman
Inman News™

In the world of financial services sometimes the easiest solutions are the hardest to implement. For those of us observing the crosscurrents in the real estate market, that certainly seems to be the case with mortgages.

President Obama and probably even the Tea Party Republicans would like to see more people buying homes today, yet we continually create arbitrary impediments to that. One of those roadblocks of arbitrariness is what is known as the conforming loan limit, which sets the highest value of a mortgage that Fannie Mae and Freddie Mac can buy or guarantee.

Maximum amounts are set each year and are determined on a geographical basis, creating disparities between a San Francisco, San Pedro and San Bernardino or a New York, York and Yorktown.

Some industry folks like John Walsh, president of Total Mortgage Services LLC in Milford, Conn., are advocating raising the conforming loan limits nationwide and giving all homebuyers who need it access to bigger mortgages.

"We get plenty of people purchasing or refinancing — in an area that does not have maximum loan limits — asking if we would be able to do the mortgage for them," Walsh said. "But, because they are one town over or one street over, they don’t qualify for the higher-balance conforming loan limit. It’s one less purchase, one less refinance where we could save the homeowner $300 or $400 a month, which they could then pump back into the economy."

For Fannie Mae and Freddie Mac, loan limits are set at $417,000 in most areas of the country. That’s not a particularly big number for some neighborhoods where houses typically sell in the seven-digit range.

To stimulate the economy and keep higher-end markets fluid, the Housing and Economic Recovery Act of 2008 temporarily raised the conforming loan limits to a testosterone-fueled $729,750 in what it called "high-cost areas," such as, for example, New York City and Washington, D.C. — in case you’re trying to figure this out in your head, that’s 175 percent over the regular conforming loan amount.

(Obviously, there are non-GSE loans for more than the conforming loan threshold, which are called jumbo loans. These days, jumbo loans are tough to get and carry more restrictive underwriting guidelines and higher interest rates.)

In the third quarter of 2010, the government once again extended the loan limit to $729,750 for high-cost areas. This extension will hold until Sept. 30, 2011, when it will be reviewed again.

The California Association of Realtors, representing a state with numerous metros considered high-cost areas, collectively breathes a sigh of relief every time the extension of the loan limits is passed.

"It certainly would be better to have it permanent, but that doesn’t seem to be the way things are going in Congress right now," said Leslie Appleton-Young, CAR’s vice president and chief economist. "Obviously, even with the decline in prices in California, we are still well above the national median in many areas."

Fourteen of 35 California counties are considered high-cost areas. Without the extension, such pricey home markets as San Francisco, Los Angeles and all of Santa Barbara and Orange counties would be hurting because it would be difficult to get financing to buy or refinance almost any house in those geographic designations.

"Financing is much more readily available if you have a loan that Fannie or Freddie will buy in the market," Appleton Young said. "A jumbo loan would be more expensive with tighter underwriting and a higher down payment. Without Fannie or Freddie in the market, there wouldn’t be a lot of transactions going on."

Unfortunately, because designated high-cost areas are limited, if you are trying to sell a home in California’s Shasta, Merced or Humboldt counties you are not going to get the same break.

That’s the inherent inequality that bothers Total Mortgage’s Walsh, who operates in the Northeast, where some communities in commuting distance to the Big Apple are considered high-cost areas but a little further out others are not, although homes are of equal value in either community.

"It’s like selective lending out there," he said. "If you live in Fairfield, Conn., you are OK, but if you are someone who has the same job, with the same house value, with the same credit score but live across the street in another town or county, you can’t get the same mortgage. The question is why? If a loan has to stand on its merits and the house stands on its merits of valuation, why not?"

He added, "Just because I live in Omaha, Neb., instead of Fairfield, why shouldn’t I be able to get the $729,750? A loan is a loan is a loan."

I hadn’t seen where Omaha/Council Bluffs, Neb., had been upgraded to a high-cost area, so I’m assuming that metro, like the rest of Nebraska, was stuck at a loan limit of $417,000 for a single-family home, which seems weird considering such well-known companies as Berkshire Hathaway Inc. are based there.

If Warren Buffet and other Berkshire Hathaway executives wanted to get a conventional mortgage for a home that I’m pretty sure would be worth more than $417,000, they wouldn’t be able to do so. Why discriminate against Warren Buffet just because he lives in Omaha and not in New York?

(At the end of 2010, the Federal Housing Administration announced its loan limit ceiling for fiscal year 2011, also establishing a high-cost-area maximum of $729,750. The old FHA Forward loan maximum for Omaha/Council Bluffs was $271,050 for a single-family home.)

"Raising the conforming loan limit to $729,750 nationwide would spur home sales and allow many jumbo mortgage holders to refinance into the historically low rates that are currently available," Walsh said.

He added, "If I’m going to apply the same underwriting guidelines, appraisal standards, credit standards and down-payment standards, why shouldn’t I be able to do these loans across the county. It would definitely spur the purchase market — and it would spur the refinance market as well."

Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade," has been ranked as a top-selling real estate investment book for the Amazon Kindle e-reader.

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