That's right, the economic stimulus package will be in effect shortly, and with it will come the ability for Government Sponsored Entities Fannie Mae and Freddie Mac, along with the Federal Housing Administration (FHA), to increase their loan purchase limits significantly in higher cost areas. Sure, more of us are thinking about the $600 or $1200 check we're getting back as part of this (flat-panel TV anyone?), but for those who own higher value homes, this potentially means two more important things:
- Easier to refinance to a better loan
- More buyers can get better financing to buy
For homeowners and homebuyers considering pricier homes, they may be able to qualify to spend more than they can currently. At present, rates for loans that can be purchased by Fannie Mae or Freddie Mac are averaging 5.67%, while rates for what are currently "Jumbo" loans in excess of $417,000 are averaging over 7%. That difference in rate becomes very significant when you consider that a homeowner might be paying 1.33% more on a $500,000 loan, or $6650 more per year in interest!
Now, I don't expect to immediately see $729,750 loans available at the same rates current conventional loans offer. Rather, it will take some time for changes to occur. Because the program is restricted to higher priced communities, there is work that must be done to implement it. Fannie Mae, Freddie Mac, and FHA must read and interpret congress' definition of a higher priced community. Determinations must be made as to whether the same rates will be offered on the larger loans, or if larger loans might carry some kind of risk-based pricing adjustment.
There are a number of challenges associated with this. Larger mortgages have traditionally been riskier for the lender than smaller mortgages. If the same pricing is offered to borrowers at the higher loan amount level, it will increase the overall risk level of loans in the pool without a corresponding increase in compensation for mortgage investors. This will cause rates on all mortgages to increase in order to more adequately compensate for the increased risk.
Alternately, a pricing adjustment for the larger loans (read: higher rates -- larger loans traditionally had rates .25% to .5% higher than conventional loans, until the market cooled recently) could be introduced, allowing investors to purchase them knowing they will receive compensation for the added risk. If something like this happens, expect to see rates for smaller loans to remain relatively unchanged as a result of this.
One other factor to consider - this change is temporary. The economic stimulus package has only authorized this change for one year. The hope behind this is that increased business in this sector will cause increased activity in other parts of the mortgage market, effectively rebooting the system. Whether it will accomplish this or not remains to be seen.