Local Experts Weigh In on Obama Mortgage Proposal

by Andrew Siddons


Today, the Obama administration released a report that, in short, offers proposals for how to reduce government support of the mortgage market. It’s fairly light on specifics, and Treasury Secretary Timothy Geithner said that the reforms will probably take five to seven years to implement. But there’s one change that will almost certainly happen later this year, and could have a tangible impact on potential homeowners: the maximum size of a government-backed mortgage will be decreased.

Over two years ago, the Housing and Economic Recovery Act of 2008 upped the limit on conforming home loans (the maximum size of a loan Fannie Mae and Freddie Mac can guarantee) in expensive areas like the District from $417,000 to $729,750. The insurance that loans up to $729,750 would be backed was reinstated in the economic stimulus bill passed at the start of the Obama administration, and was renewed again last year.

Today, the administration recommended that Congress allow the temporary increase in those conforming loan limits to expire on October 1, 2011, effectively reducing the limit to $625,500. The report also said that mortgage rates are “likely to rise somewhat under any responsible reform proposal.”

“We will work with Congress to determine appropriate conforming loan limits in the future, taking into account cost-of-living differences across the country,” the report said. “As a result of these reforms, larger loans for more expensive homes will once again be funded only through the private market.”

Local mortgage professionals say that if the limit for non-conforming “jumbo” loans is decreased, interest rates for more expensive homes will likely rise, and buyers looking to purchase in this price range will need to have more money set aside for a down payment.

“Rates are typically higher for jumbo or non-conforming loans,” said Tom O’Keefe of Prosperity Mortgage Company. “[Non-conforming loans] could come with slightly more stringent underwriting guidelines, down payment requirements, post-closing liquidity or reserves. The result is that it could be a little bit more difficult in that segment to get financing.”

With a stated deadline of October 1st, O’Keefe said there isn’t an immediate worry for buyers who are currently and actively in the market for a home. But as September approaches he thinks folks will need to be more cognizant, because the loan amount that they are prequalified for might not be there a week or a month later.

Stephen Fuller, a professor at George Mason University and an expert on the DC-area housing market, also thinks that it’s going to be a while before anything is finalized, and that only a small segment of the market will feel an impact.

“In the market where houses are priced in the $500,000 to $1 million range, where jumbo loans are really important, it could keep that market from moving,” he said, and echoed O’Keefe’s prediction that application standards could rise. “Not only would the interest rates move up [for loans above] $625,000, but also the down payment requirements and qualifications [would increase].”

Fuller noted that if the cost of borrowing rises, that could also mean that houses priced above $625,000 would need price adjustments.

“A property might not sell for the same price as it would have with jumbo loan limits up to $729,000, because of less availability for financing. If demand is weakened, then prices would be affected.”

While it’s hard to predict what will happen as a result of the proposals in the long-term, Fuller thinks that any change in limits for jumbo loans could spur activity in that market ahead of the fourth quarter, since buyers will race to beat the deadline and get cheaper financing.

See other articles related to: obama, mortgages, freddie mac, fannie mae

This article originally published at http://dc.urbanturf.com/articles/blog/local_experts_weigh_in_on_obama_mortgage_proposal/2983


  1. mortgagor said at 10:20 am on Saturday February 12, 2011:

    I’m glad to hear that the limit isn’t going back down in 417,000 because the 417,000-625,000 range (and usually to the higher end, 500,000+, at least close in) is a common entry price.  Any thoughts on whether price compression above the new limit will affect the next tier down?

  1. uriela said at 12:39 pm on Saturday February 12, 2011:

    Can someone help me understand why someone who can afford to pay a $417-625,000 mortgage need a government insured loan or any form of governmental assistance?

  1. mortgagor said at 1:06 pm on Saturday February 12, 2011:

    People make more money here, but the cost of housing is higher so that is a common range for a first-time buyer.  If a policy goal of insured loans is helping first-time buyers, help first-time buyers in urban areas, too—not just far out suburbs.

  1. Andy said at 4:03 pm on Saturday February 12, 2011:

    Uriela - I think its worth noting that the price of the house is one thing, but it is the downpayment and interest rate that we are really concerned with - that’s what you pay every month.  When we look more closely at first time buyers, many have good credit scores (720+) and have carefully saved who 30-40k for a downpayment.  In the DC market, that is somewhere in the 4-6% range and that’s not good enough for many lenders without a some kind of guarantee against loss. A Federal guarantee helps keep rates lower and lowers the minimum downpayment.  All of this allows credit worthy folks with the ability to make the payment to get into the market.  Our economy rides on the housing market with many businesses - big and small - relying on this system.  If we cut the government’s assistance, which again is a guarantee on the loan, not necessarily cash to the buyer/seller, a huge % of the DC population including folks who make well over $150k a year, will be largely shut out of buying their first home. I would argue that the system is not broken; in fact, it worked as it should have with the Government guarantee picking up the slack during the econominc down-turn. Yes, there are some real adjustments that need to be made, but most of the problem that led to all of this mess likely rests elsehwere - individual responsibility, speculation, bank profit margins, less than stellar lending standards, and the great evil of prolonged high unemployment.

  1. tds said at 4:19 pm on Monday February 14, 2011:

    When is Congress expected to vote on this plan?

  1. ossipago said at 10:28 pm on Tuesday February 15, 2011:

    Re: Andy

    That is ridiculous. If someone making $150K a year can’t save $100K for a down payment, they haven’t shown the fiscal responsibility needed to own a home and can keep renting, or they have wild over-expectations on what constitutes a “starter home.” I saved near that easily enough on 1/3 the salary. Owning isn’t a right, and the government shouldn’t be in the business of subsidizing it (including with mortgage interest deductions). Renting, even for life, is just fine; the people who can’t save more than 5% of a down payment will probably come out financially better off than if they had bought.

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