Help on big loans is up in the air
George DeAnda wants to refinance his $540,000 mortgage. So like many homeowners with so-called jumbo loans, the Yorba Linda resident has been anxiously awaiting new government rules that were expected to make big mortgages more available and less expensive.
But Congress’ plan to help the jumbo-loan market -- passed two weeks ago as part of the Economic Stimulus Act -- still is a work in progress.
Key details of the plan were left to the Department of Housing and Urban Development to nail down, which may take until next month.
What’s more, the securities industry’s biggest trade group last week surprised lenders when it recommended that larger loans be in effect isolated from smaller mortgages in the “secondary” market, where loans are packaged into securities for sale to investors.
That could keep interest rates on jumbo loans higher than some borrowers had hoped, analysts say.
All of this has many homeowners who want to refinance, as well as would-be buyers, on edge -- particularly in the high-priced California market.
“We have been fielding phone calls for the past three weeks and are sitting on a bunch of loan applications that are signed and ready, just waiting for the new loan limits,” said Jeff Lazerson, president of Mortgage Grader, a Web-based loan shopping service in Lake Forest. “People have been counting their chickens.”
The market for large mortgages has been a major casualty of the credit crunch that has slammed the economy since late summer.
As loan delinquencies have soared and scores of mortgage lenders have folded, many remaining lenders have become unwilling to make loans unless they know they can sell them to Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies.
But under federal rules, Fannie Mae and Freddie Mac couldn’t buy loans larger than $417,000 -- the limit for what was labeled a “conforming” mortgage.
The Economic Stimulus Act gave HUD the ability to boost conforming loan limits in high-cost areas to as much as $729,750 through the end of this year.
The hope was that that would quickly help support refinancings and home purchases in expensive markets hit hard by the housing downturn.
But Congress left it to HUD to set new conforming-loan limits by region, based on a formula that takes into account the median home price in each region.
The department has 30 days from Feb. 13 -- the date President Bush signed the act -- to revise the loan limits.
HUD officials said this week that they had not yet come up with numbers. The department is expected to set new conforming limits on a county-by-county basis, just as it does for Federal Housing Administration-insured loans.
If HUD’s home-price data are similar to recent figures published by DataQuick Information Systems, analysts say conforming-loan limits would skyrocket through much of California, from the current $417,000 to at least $572,500 in Los Angeles County and $650,000 in Orange County.
Loan balances, however, are just one component of what makes a loan conforming. Other issues include the type of income documentation provided and a borrower’s credit score.
At Freddie Mac in McLean, Va., spokesman Doug Duvall said the company was discussing what the standards should be for larger conforming loans.
“We are going to be defining the loan-to-value ratios, how much down payment the person needs and the credit score of the borrower,” Duvall said. “These are some of the things that we measure. We are wrestling with how different those will be from the traditional conforming” loans.
Even if Freddie Mac and Fannie Mae begin buying significant numbers of larger loans, it isn’t clear how significant an interest saving that will mean for borrowers.
That’s because of the way the loans will be treated in the secondary market, where they will be bundled and sold to investors through mortgage-backed bonds guaranteed by Freddie Mac and Fannie Mae.
The Securities Industry and Financial Markets Assn., the industry’s main trade group, said last week that the larger conforming loans should be segregated from smaller loans in the secondary market.
The group said that isolating the loans, rather than mixing them with smaller mortgages, could avoid the risk that jittery investors could demand higher rates on all mortgage-backed bonds, raising loan rates across the board.
But segregating the larger conforming loans could keep rates on those loans from dropping as much as many borrowers had anticipated.
On Thursday the average national rate for a 30-year conforming loan was 6.27% plus 0.23 of a point on the mortgage amount, according to rate tracker HSH Associates in Pompton Plains, N.J.
By contrast, the average rate for a jumbo loan was 6.98%, plus 0.33 of a point.
“What we were all jumping up and down about is that we were going to have jumbo loans at conforming rates,” said Greg Nierenberg, branch manager of Approved Capital Mortgage in Woodland Hills.
“Now we’re hearing speculation that there are going to be loan-rate tiers. But no one knows exactly how it’s going to work out.”
For George DeAnda, who has a loan rate of 6.125%, rates on larger loans would have to come down significantly to make it worth his while to refinance.
“If I don’t see at least a half-percent discount from what I am paying now, I wouldn’t consider refinancing,” he said.
Fannie Mae Chief Executive Daniel Mudd on Wednesday criticized the secondary-market decision by the securities industry group.
Speaking at a housing-industry summit sponsored by the Reuters news agency, Mudd said the move meant that “a separate market is effectively going to have to be established and created” for the larger loans.
“As a result of that, the impact will take longer to be realized” in terms of helping the housing market, he said.
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