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Conforming Loan Limits Reflect The Cost Of Housing
Staff - Mortgage Lenders Plus.com
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Fannie Mae and Freddie Mac are the two federal agencies that purchase mortgages from commercial lenders. The huge majority of home loans are sold to these two agencies, so that commercial lenders can take their money, turn around and loan it out again. Every year, the agencies set a conforming loan limit that establishes the highest mortgage the two agencies will purchase. Any loan above that amount is called a “jumbo loan,” and generally has a higher interest rate attached to it.
The conforming loan rates are based on the average home cost, as established by the Federal Housing Finance Board. Accordingly, the annual adjustment of conforming loan limits reflects the home appreciation rate. Over the last three years, the conforming loan limit has jumped from $333,799 in 2004 to $417,000 in 2006. That reflects a phenomenal hike in home prices.
The FHA also adjusts the maximum conforming loan level for mortgages that they will insure. They separate their annual figures into locales with average home prices and those with high home prices. From 2004 to 2006, the FHA maximum on an insured mortgage went from $160,000 to $200,000. Their high cost notes over that period topped out at $290,000 and $360,000 for those two years.
The figures from all three agencies show an average increase in home value over three years of about thirty percent. The actual time period for this remarkable curve in home appreciation was actually for the years 2003 through 2005, since the new conforming loan limits are announced on January 1st of each year and based on the previous year’s statistics.
It seems that the home appreciation curve has flattened out as of September 2006, but the run-up over the previous three years explains the home buying and refinancing frenzy. The activity in jumbo mortgage loans was brisk as well, despite the conforming loan limits. These loans are left to the commercial lenders to package themselves, as the goal of Fannie Mae and Freddie Mac is to contribute to keeping mortgage rates for mid-range homes at the low rates.
Jumbo loans presumably go to more affluent borrowers, so they are not considered undue credit risks. The reason that rates are higher on these mortgages beyond the conforming loan limit is that they can’t be summarily shipped to Fannie Mae. Also, buyers in the upper range are more likely to pay off their mortgages early for a variety of reasons. Lenders therefore assume that a jumbo loan is less likely to run its course than a conforming loan.
The years from 1999 to 2002 also reflect the boom in home value. The conforming loan rate over those four years jumped over 25%, from $240,000 to $300,000. In response to this five year spurt in value, the financial community has taken a dual course of lowering standards for conforming loan qualification and developing mortgages such as the interest only ARM that saddle starry eyed buyers with some very difficult debt management challenges in the future.
The lending institutions will declare that with conforming loan limits so high, interest only and option ARMs with enormous readjustments built into them were designed for sophisticated buyers who know how to manage credit. Somehow, they slipped into the hands of millions of home buyers who are going to have to deal with a trillion dollars in readjusting debt in 2007.
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