Local Experts Weigh In on Obama Mortgage Proposal

• February 11th 2011

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.

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