Jumbo Conforming Limit Expiring 10/1/11

ps99472

ps99472

New member
This was brought up in another thread but thought it should deserve its own.  The Govt's Jumbo Loan Conforming limit will drop from $729K to its old $625K limit unless congress votes to extend it again (unlikely due to Republican control of the House).  Now, I'm not an expert, but this was originally done to soften the housing crisis.  If lending stops for homes in the $781K (625/80%) and above range, this would exert a tremendous downward pressure in prices during a housing price decline.  If you take buyers off the table because they don't qualify for a loan, that would decrease demand and hence a price drop (I remember supply/demand curve from econ class in college).  I can't be sure but wasn't private bank jumbo lending all but non-existent a couple years ago? 

Looking ahead in my crystal ball, if the conforming limit drops in Oct.  this would put pressure on the homes in the $800k and above range?  Wouldn't builders like iPac look at their pre-qual list and see a big problem for everyone who qualified for a 20% down finance?  I got an email from BofA a few days ago regarding this issue and they were trying to get people to buy in Maricopa now.  I chose not to purchase in the 1st and 2nd phase at Maricopa.  Phase 2 move-in is already in Oct.  That means I will be one of the buyers who would not be able to secure a favorable jumbo loan when I need to close on my purchase.  Doing a Zillow mortgage search shows very few non-conforming lenders even now before the conforming limit drops.  Not to mention the interest rate can possibly go up after QE2 ends in June and that private bank lending will be at least 1% higher then its conforming counterpart.  If the worse happens, and builders can't move their $900k homes and needs to drop into the lower conforming limit's sweet spot, this would push all prices down right?  If $900k goes to $781K then where would the $781K homes go?  So only cash buyers can support the prices in Irvine?
 
To answer some of your questions:

* jumbo lending is available (never went away but most where in hiding)
* jumbo lending products are more commonly available on ARM products but Fixed products are available
* jumbo products are available with as little as 10% down
* interest rates on jumbo programs are higher so despite their availability (still under 6% for a 30 year fixed), the same downward pressure on pricing would still be felt
* another option is to combine a $625k first loan with a 2nd up to 80% LTV - while not ideal, it can be a potential option for some

I have noticed that more lenders seem to be positioning themselves for the upcoming change.  More lenders are adding true jumbo loan programs to their portfolio.
 
As a simple exercise to see rate differences between loan categories, assume the following with a fictitious example:

* single family residence or detached condo
* "perfect" credit
* 20% down-payment
* owner-occupied
* all other factors allow for approval
* no points
* borrower pays "standard" closing costs
* no impounds
* 30 day rate lock

The following estimates might be available:

* traditional conforming 30 yr fixed loan:  ~4.750% with ~0.5 pts credit towards closing cost
* jumbo conforming loan 30 yr fixed loan:  ~4.875% with ~0.25 pts credit towards closing cost
* true jumbo 30 yr fixed loan:  ~5.625 with ~0.25 pts credit towards closing cost (or pay ~0.5 pts and get a 5.375% rate)

Jumbo rates are definitely higher but still available.
 
myirvine said:
As a simple exercise to see rate differences between loan categories, assume the following with a fictitious example:

* single family residence or detached condo
* "perfect" credit
* 20% down-payment
* owner-occupied
* all other factors allow for approval
* no points
* borrower pays "standard" closing costs
* no impounds
* 30 day rate lock

The following estimates might be available:

* traditional conforming 30 yr fixed loan:  ~4.750% with ~0.5 pts credit towards closing cost
* jumbo conforming loan 30 yr fixed loan:  ~4.875% with ~0.25 pts credit towards closing cost
* true jumbo 30 yr fixed loan:  ~5.625 with ~0.25 pts credit towards closing cost (or pay ~0.5 pts and get a 5.375% rate)

Jumbo rates are definitely higher but still available.
Click to expand...

So let's plug in some numbers comparing the jumbo conforming and non-conforming using a loan balance of $729K with 5 year endpoints.

Conforming 30 yr 4.875%

Monthly Payment = $3858
5 year balance = $668,236
5 year interest = $170,711

Non-conforming 30 yr 5.625%

Monthly Payment = $4197(+339)
5 year balance = $675,146(+6910)
5 year interest = $197,938(+27,227)

5 year monthly savings = $339x60 = $20,340

So going with the 30 year product, if the conforming limit is lowered, I  will have to pay $20K more over 5 years and also have a higher balance at the end of 5 years. 

These are really expensive loans... I'll do some calculations for 5/1 ARMs later
 
Most "true jumbo" 30 fixed rates today are 5.375 to 5.50% today for -0- origination fee.

I sent a note to my Realtors this weekend about this very issue. I asked them to consider time as they pursue their sales strategies. Why time? Not all, but most listings taken in May will not get an offer until July. Most escrows are 45-60 days. That puts the COE into September. If it's a short sale, fugghetabout closing until October / November depending on circumstance. That means the time to sell while financing is available is N. O. W.

People believe that Banks will start relaxing guidelines and fill the gap between Conventional loans and Jumbo / AKA Portfolio loans. Look no further than Riverside and San Bernardino. Getting a home financed when the price is above 700K out there is relatively difficult. You've got to put more down, walk on water with your income and credit, and of course the appraisal has to me bulletproof. The price ceiling then for the I.E. is sub $650k since the max Conforming Jumbo is $500,000. We already have a template for what's going to happen in OC come October. Those sellers still hanging on to their wishful thinking list price better lay off the Kool-Aid and switch to a bracing cold glass of Dihidrogen Monoxide to sober up and sell.

My .02c

Soylent Green Is People.
 
I can't be sure what the typical rate for jumbo 5/1 ARMs (maybe SGIP can verify?) since Zillow and Bankrate were all over the map..so here is an estimate for $729K and 5 year endpoints data.

Conforming 5/1 ARM 3.00% ($0 fees)

Monthly Payment = $3073
5 yr balance = $648,128
5 yr interest = $103,537

Non-Conforming 5/1 ARM 3.375% ($0 fees)

Monthly Payment = $3223
5 yr balance = $652,478
5 yr interest = $116,852

Who knows what the interest rates will be in the second half of 2011 but looks like if I want to buy, it would be using one of these products.  30yr is just too expensive.  I know the monthly payment blows up to $5000 at the end of 5 years but on the other hand you're also much closer to the conforming limit balance.  If you make some extra payments (the monthly difference between the two non-conforming products is almost $1k), you can refi again into a conforming loan. 

 
What are the chances of not extending the deadline?

Despite the NAR's claims, housing has not rebounded and while a lower jumbo conforming will put downward pressure on pricing, they didn't throw all that cheese at us in 2009/2010 just so that they can remove some of the props holding up the market.

You have two scenarios here:

1. Lower jumbo limit will force prices down so that more people can afford to buy (but is dependent on sellers lowering those prices based on "new" limits).

2. Same jumbo limit will allow people to buy at certain price points without having to put more money down.

Which one of those is more likely to spur sales in the next year or two?
 
irvinehomeowner said:
What are the chances of not extending the deadline?

Despite the NAR's claims, housing has not rebounded and while a lower jumbo conforming will put downward pressure on pricing, they didn't throw all that cheese at us in 2009/2010 just so that they can remove some of the props holding up the market.

You have two scenarios here:

1. Lower jumbo limit will force prices down so that more people can afford to buy (but is dependent on sellers lowering those prices based on "new" limits).

2. Same jumbo limit will allow people to buy at certain price points without having to put more money down.

Which one of those is more likely to spur sales in the next year or two?
Click to expand...
IHO,

There are far more than just two scenarios...

For example, here are some of the variables, listed in order of importance:
1. Down payment requirements can be increased or decreased.
1. Credit score requirements can be tightened or relaxed.
1. Loan limit amounts can be shifted (as you mentioned above).
1. Deadlines can be shortened, extended, or continually threatened (also mentioned above).
1. Appraisal practices can be altered  to reflect higher or lower standards.
1. New categories and programs may be created/replaced. Conforming, Jumbo-Conforming, Zombie-Conforming, Jumbo, and Super-Jumbo anyone?
1. External forces (stock market performance, employment outlook, cost of living changes, government subsidies, international geopolitical events, natural disasters, etc.) can all make a difference themselves.
1. many, many more...

They're all listed as #1. Any one of them can change the game. 
-IR2
 
IrvineRealtor said:
There are far more than just two scenarios...
[...]
1. many, many more...
Click to expand...
You are absolutely correct... I was just trying to simplify things and keep them focused on the single item.

Outside of the gov's official jumbo conforming limit, all those things listed could/would be new or modified and can vary by location, lender, type of product etc etc.

I'm just trying to guess what would happen if:

1. The deadline did expire and the limit went back down to $625k.

2. They extended the deadline and kept the current $729k+ limit.

I obviously prefer the higher limit, especially in an inflated area like SoCal and while I do want to see downward pressure on prices, I'm not sure how quickly that would produce the kind of market correction we would hope (especially when all the things you mentioned will be enacted first). It's not like Maricopa is going to change their upgraded Plan 2 $900k price to $781k because of the change in the jumbo limit.

This was discussed on the IHB and as a whole this will probably not have a huge effect on the Irvine market because people buying in the jumbo range can a) probably put more down or b) afford the higher rates (because even at above jumbo limits, the rates are still lower than they were not so long ago).

I'm sure we'll see new lending categories created...  and am quite interested as to what limits a "Zombie-Conforming" loan would have.
 
Each bank that decides to step up and fill in this air pocket of missing finance options is going to face quite a bit of risk. Banks aren't risk tolerant when they cannot off load their loans to a third party - in this case FNMA/FHLMC. There will be some securitizing of these loans but even then whomever is going to buy them will want the loans to be bullet proof. Let's assume also that prices do come down as a result of loan limit reductions. Are investors then willing to buy a Mortgage Backed Security when the value of the asset is falling? They might if the average loan is 70% LTV or lower. At a $900k that's a $630k loan, making the likely pool of MBS's focused on prices above $1m in order to meet investor appetite and consumer demand. Don't know the average down payment on $1m priced homes. It has been 27% to get to the $729k loan limit.

A borrower will also face a daunting task of comparing loan terms, not just rates. Let's say BofA offers a $700k fixed with a 5% rate, as does Wells Fargo, Chase, and others. Since each lender has their own unique underwriting guidelines, ratio caps, income and asset criteria and FICO requirements, the rates appear to be equal but your ability to obtain that loan is not.

Irvine may be a bit immune to the $104k reduction in Conforming loan limits what with the larger down payments and FCB's but if someone can look up loans closed in the past 4 months between $625k and $729k, correlated with the purchase sales prices, that's the market that will be most impacted by these reduced loan limits.


My .02c

Soylent Green Is People
 
I remember sending Campbell an email about this and he has acted.  The power of democracy...with one email.

Friday, 15 July 2011 12:42

 

Reps. Campbell, Ackerman Introduce Bipartisan Bill to Extend Conforming Loan Limits

H.R. 2508, The Conforming Loan Limits Extension Act Would Maintain Financing for Homebuyers

With the GSE and FHA loan limits scheduled to adjust downward from $729,750 to $625,500 this fall and the private mortgage market still recovering, Representative John Campbell (R-CA) and Representative Gary Ackerman (D-NY) have authored a two year extension to keep conforming loan limits at 2008 levels. Introduced this week, H.R. 2508, the Conforming Loan Limits Extension Act would safeguard access to GSE and FHA financing for thousands of qualified homebuyers and maintain equitable availability of these loans across the diverse housing markets in the United States.

Numerous industry reports have forecasted severe economic downturn should the conforming loan limits scale back as planned, some predicting 669 counties across 42 states will be significantly affected by this change in loan limits.  The nationwide average decline in these loan limits would be greater than $68,000, making ineligible 27% of all owner-occupied homes in the United States for GSE financing and more than 59% of all owner-occupied homes for FHA financing.  The National Association of Home Builders recently estimated that 17 million homes in the United States will become ineligible for consistently available funding if the maximum mortgage limit is reduced.

?Housing makes up one sixth of the American economy and is a key component to our economic recovery,? said Campbell upon the bill?s introduction. ?H.R. 2508, the Conforming Loan Limits Extension Act, will ensure that qualified homebuyers in this country continue to have access to the financing they need at a time when there are few alternatives. This will not only help to stabilize home prices, but would also provide for continued recovery in the broader economy.?

?The housing market does not need to a self-inflicted wound,? said Ackerman. ?With the economy remaining fragile and the housing sector still struggling to recover, now is not the time to make the cost of mortgages more expensive. Reducing the conforming loan limit would hurt home values, increase the cost of down payments and interest rates, and shut prospective buyers out of home ownership. It is essential that we continue to do all that we can to stimulate our economy and keep these mortgage limits in place to ensure that the housing market remains on the delicate road to recovery.?

H.R. 2508 has been referred to the House Committee on Financial Services. Both lawmakers have expressed an expectation for a hearing before October 1.
 
"Hearings" do not mean "voting for acceptance of the bill". This is smoke and mirrors during a time when debt ceiling and fiscal reform should be on the plate. For all intents and purposes everyone will shut the tap off August 1st, 4 days from now. By the time this comes up the market will have adjusted to the new reality.

My .02c

Soylent Green Is People. 
 
so is there anything flowing out of the tap?    I'm anxiously waiting for iPac to drop Maricopa plan 3 down to $840K...   
 
Seems like it will.

Most jumbo lenders today have a rate still .375 to .50 over Conforming loan limits, plus they require 20% down. The return of higher limits is going help buyers with less than 20% down and very thin cash reserves. The other borrowers who this will help are those with large down payments and simply want a lower payment. That's not really a "help" per-se, as it would be in this category of buyer's best interest to have sellers reduce their prices by 10-15% than to save .375 on their long term mortgage rates.

Anything including the kitchen sink to keep prices higher. At some point this war's got to end...

My .02c 
 
SGIP:

Have you noticed any changes in number of purchases/refis when the 10/1 limit went into effect (starting around August or so)?
 
Not in So Cal. Most of the rush to get the limits raised isn't in the high priced areas - OC, SF, etc, it's in the places that had their limits really whacked - the IE, Monterey, and other places.  We saw very few $729 FHA's with 3.5% down, more than one might expect, but not enough to "make a market". Once the limits were lowered in August it hit mostly refinance borrowers than purchase loans. With rates where they are overall though the refi market hasn't slacked.

My .02c
 
So now that the limit is back up for FHA (not Freddie and Fannie)... how will this play out?

It seemed the new limit was causing some downward pressure on pricing but I'm not sure if that was the only reason.
 
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