Beginning on Oct. 1, the government will dial back on the size of mortgages it guarantees in high-cost areas like San Francisco, New York and Washington. After that deadline, the maximum loan amount that Fannie Mae and Freddie Mac will back is scheduled to drop from $729,750 to $625,500.
“For people planning on exiting the market altogether (such as retirees), that is a compelling proposition,” Stan Humphries, chief economist at Zillow, told MSNBC. Home sellers may have to be patient to get the price they want. The curbs on government-backed loans could, at the margin, reduce the available pool of buyers, he said.
The deadline will mean $1 million buys a nice house, but not a mansion, for upper-middle-class buyers and sellers. Business is picking up in the high-end market; the National Association of Realtors reported that the sale of homes over $1 million were up 5.1 percent in March over the same month last year.
“We are seeing a normal recovery,” said Jed Smith, managing director of quantitative research. “I’m sure somebody will accelerate their activity (because of the expected drop in government-backed loan limits), but I doubt you’ll see a lot of acceleration because of that.”
According to MSNBC, the mortgage industry will have find a way around the changing rules of jumbo loans, because if they don’t, they will go out of business.
Mortgages that are too big to be sold to Fannie and Freddie are termed jumbo loans and are backed privately. Until 2008, according to MSNBC, all home loans over $418,000 were considered jumbo loans. In that year, a stimulus-focused Congress twice raised the limit on loans the government would back in high cost areas, first to $625,500 permanently, and then to $729,750, temporarily.
In 2010, so-called “jumbo conforming” loans, those over $417,000 and government-backed, made up 6.73 percent of loan originations, according to CoreLogic. That top temporary limit was extended twice, but is expected to expire at the end of September.
When that happens, lenders who want to make loans over $625,500 will have to hold onto the mortgage themselves or find private investors to buy them. And while an active and hungry secondary market for these jumbo loans has yet to materialize in the post-crash world, there’s some evidence that lenders are preparing to move into that space and pick up any slack that the government leaves.
“There’s plenty of money out there,” said Steve Hopps, chairman of the California Mortgage Bankers Association.
In the last quarter of 2010, private lenders originated more loans over $417,000 (the traditional jumbo market) than did government agencies. The lower loan limits will leave about $10 billion more in loans for private lenders to handle.