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October 1st: How Lower Loan Limits Will Affect Housing in DC

by Mark Wellborn

October 1st: How Lower Loan Limits Will Affect Housing in DC: Figure 1

Back in February, the Obama administration issued a report for how to reduce government support of the mortgage market. One aspect in that report that has been back in the news recently is that, on October 1st, the temporary increase on conforming home loan limits will expire, effectively reducing the limit to $625,500 in the DC area.

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 Washington Metropolitan area from $417,000 to $729,750 because the availability of those size loans in the private market all but disappeared. 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, as Rep. John Campbell (R., Calif.) and Rep. Gary Peters (D., Mich.) propose legislation that would replace Fannie Mae and Freddie Mac with private companies that issue mortgage-backed securities with explicit federal guarantees, UrbanTurf decided to take a closer look at how the mortgage process currently works and how it would change come October 1st.

These days, if a lender puts a borrower’s loan application through Fannie Mae and Freddie Mac’s Desktop Underwriter (an automated underwriting system), and it is approved, then the government assumes the risk of a borrower defaulting on a loan up to $729,750, not the lender. However, on October 1st, the default risk for loans over $625,500 in areas like DC will fall to the lenders, not the government.

What the change means for borrowers is likely higher down payments and interest rates, and dealing with more stringent underwriting guidelines from lenders, Bill Slosberg of Falls Church-based Acacia Federal Savings Bank told UrbanTurf. Slosberg also noted that the lowering of limits could also mean that houses priced above a certain point would need price adjustments, and he is not alone in this assessment.

“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,” local housing expert Stephen Fuller told UrbanTurf back in February. “If demand is weakened, then prices would be affected.”

Slosberg echoed Fuller recently, speaking of a ripple effect that could occur in the DC region later this year.

“The new loan limits will consequently limit the pool of buyers for homes in a certain price point, which means that sellers might be forced to lower prices,” he explained. “So, for example, if a home in Alexandria that once sold for $800,000 is forced to sell for $750,000, then the price on a similarly-sized home in Fairfax will be forced to drop, and the ripple effect will continue as you get further out.”

While it’s hard to predict what exactly will happen as a result of the lowering of limits, both Fuller and Slosberg think that the October 1st change will likely spur activity in the area housing market ahead of the fourth quarter, since buyers will be racing to beat the deadline and get cheaper financing.

See other articles related to: mortgages, lending reform, interest rates, freddie mac, fannie mae

This article originally published at http://dc.urbanturf.com/articles/blog/october_1st_how_lower_loan_limits_will_affect_housing_in_dc/3479

8 Comments

  1. lauren said at 2:46 pm on Friday May 13, 2011:
    @ J, that's another good point. I did know that the new rules would only apply to loans over $625k, not house sales over $625k (although the wording in my last comment was a little sloppy). But I didn't realize that even for loans over $625k, the new rates will only apply to the amount of the mortgage in excess of that amount. So the whole thing is really even more minor. It reminds of me of when people freak out about tax increases, of say, income over $200k when their income is $210k.
  1. Suzanne Des Marais said at 8:55 pm on Thursday May 12, 2011:
    The issue is not "government subsidies" for people buying up to $729,000. The issue is what happens to the cost of financing for properties above $625k, which represents a substantial portion of our market in DC. Interest rates and down payments for jumbo loans become higher and more difficult to qualify for (despite the credit-worthiness of the potential borrower). If people can't afford financing or otherwise can't get it, homes don't sell.
  1. lauren said at 9:05 pm on Thursday May 12, 2011:
    That's what I mean by subsidy... by assuming some of the risk, the Feds are subsidizing the market by making borrowing cheaper. I realize they're not directly handing cash to the buyer. It's just hard for me to believe that banks will stop making loans to buyers they believe are credit-worthy, and there will no be no house sales in DC over $625k. Buyers will just have to pay the full price of the loan, and maybe prices will come down a little to accommodate. I don't see why it's such a cause for alarm.
  1. J said at 2:21 pm on Friday May 13, 2011:
    To be clear, the concern is not homes priced above $625K. A buyer of a $625K house is not going to borrow 100% of the purchase price, therefore the issue is not for homes priced over $625K. The real burden begins for the borrowed money which exceeds $625K, which would translate to homes priced over $695K for buyers making down payments of 10%. At $695K, and a 10% down payment, the mortgage would be $625K, which would conform with the new loan limits. For buyers making 10% down payments, they will pay slightly higher interest rates on ONLY THE ADDITIONAL MORTGAGE DEBT ABOVE $625k, for a home priced over $695K. If the home is priced at $750K for example, the higher interest rate would apply to 90% of the additional $55K.
  1. Suzanne Des Marais said at 6:56 pm on Thursday May 12, 2011:
    This week the National Assocation of Realtors(r) is holding their annual Mid-Year meetings in DC. There are literally thousands of Realtors(r) up on The Hill this week talking to their Senators and Representatives about this and other housing-related issues. This is just one legislative or regulatory issue that could significantly impact the DC market in the near future.
  1. Eric said at 8:02 pm on Thursday May 12, 2011:
    Very informative article! Are there any details on the bill that was proposed today?
  1. lauren said at 8:15 pm on Thursday May 12, 2011:
    Am I the only one not really bothered by this? The limit of $625k is still pretty high, even for DC. And if you're looking at a range higher than that, should you really need gov't subsidies?
  1. Mike said at 8:31 pm on Thursday May 12, 2011:
    @Lauren, I think it's easing off the top of $729k. If it dropped to the $417k over night, the local real estate market would grind to a trickle and property values would start dropping rapidly as demand drops. I would guess that over the next 3-4 years, the conforming rates will come down to whatever the market will bear and we will see easing of prices that correspond with higher interest rates and lower conforming (or hopefully) market rates.

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