Higher limits for federally backed loans

Keychain shaped like a house with 2 keys

Three government-backed mortgage programs are now allowed to make larger loans.

In theory, the changes should make it easier for thousands of consumers to obtain the money they need to buy or refinance a home, and at lower rates and better terms than they could previously obtain.

But with lenders charging more for mortgages that exceed the old limits, the new loan limits may not be as helpful as we had hoped.

The economic stimulus plan Congress approved in February raised the limits for:

Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp.) buy loans from banks and mortgage companies, bundle thousands of them together and resell the debt to investors.

Investors are more willing to buy the debt packaged and sold by Freddie Mac and Fannie Mae because they only buy loans that meet their standards for creditworthiness.

Borrowers who meet, or conform, to Freddie Mac and Fannie Mae's requirements benefit, too, by paying lower interest rates than they would for nonconforming loans.

But federal law previously didn't allow them to buy loans for more than $417,000.

That one requirement forced many buyers in cities where housing costs are especially high, such as Los Angeles, San Francisco and New York, to obtain more costly jumbo loans that couldn't be sold to Fannie Mae or Freddie Mac.

The current mortgage crisis was triggered by a rash of defaults and foreclosures on nonconforming loans, primarily subprime mortgages given to borrowers with bad credit who couldn't meet Freddie Mac or Fannie Mae's standards.

Though jumbo loans haven't been a big problem, investors are reluctant to buy any mortgage debt not backed by Freddie Mac and Fannie Mae.

As a result, the average jumbo loan has cost well above 7% since last summer, or a point to a point-and-a-half more than the average for conforming loans.

The stimulus bill allows Freddie Mac and Fannie Mae to buy more expensive loans through the end of the year. Abandoning the one-size-fits-all approach, each city has its own limit based on the local median home price.

Initial reports suggest the new limits aren't helping as many homeowners as expected, primarily because lenders are charging one-half to three-quarters of a point more for the larger conforming loans.

"It's a tease," Debi Zentner, a mortgage broker with Diversified Capital Funding in Pleasanton, Calif., told the San Jose Mercury News. "It's not going to be the panacea we had expected."

We're hoping that will change as lenders become more comfortable with bigger, conforming loans.

FHA loans were created 70 years ago to help first-time buyers, especially low- to moderate-income families and minorities, get the home financing they need.

Because the federal government guarantees repayment, the lender knows it will not lose money on the deal. That allows the bank or mortgage company to offer competitive rates on a loan that's easier to qualify for than a conventional home loan.

The previous strict limits on the size of FHA loans prevented them from keeping up with soaring home prices.

Under the stimulus bill, the FHA can insure loans of up to 125% of an area's median home price, to a maximum of $729,750, until the end of the year.

That's far more than the previous limit of $362,790 in high-cost cities and $200,160 in what the FHA considers standard areas.

In California, for example, the new limits range from $271,050 in lower-cost areas such as Lassen and Trinity counties to the full $729,750 in the entire San Francisco area, where the median home price is $846,000.

Buyers in high-price East Coast cities, such as New York and Washington, D.C., also will enjoy the new, highest limit of $729,750. In all, 75 areas out of about 3,200 will qualify for the maximum cap.

Even cities that don't qualify for the highest limit will benefit from the change. In Boston, for example, the new rules increased the FHA loan limit from $362,790 to $523,750.

But once again, borrowers are being forced to pay higher interest rates for the bigger loans. Initial reports say lenders are charging about three- to four-tenths of a point more than traditional FHA-insured mortgages.

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