The normal Fannie Mae and Freddie Mac conforming loan limit for single family homes is $417,000. This number is supposed to be correlated with housing prices, and even though housing prices are off 20% or more in the last two years, that limit was left in place.
In the recent economic collapse, the private end of the secondary market vanished. That was the part that did jumbo loans, those over $417,000. So in an effort to help stabilize the mortgage market, in 2008 Congress raised the conforming loan limit for some high housing cost areas from $417,000 to $625,500.
Not long thereafter, it was further increased on a “temporary” basis to $729,750. Note that this was “temporary,” and that temporary limit was set to expire last year but it was extended. It is now set to expire on September 30, 2011.
I don’t know how you feel about the government’s support of the mortgage industry, but I think that they are getting a little tired of it. They haven’t figured out how to unhook Fannie and Freddie, but I think it would be easy politically for them to stop doing loans over $625,500. People with $700,000 loans don’t get much sympathy in a world where one-third of all homeowners with mortgages have negative equity and three million others either have been foreclosed upon or are about to be.
To me, that means if you live in a high cost area and need a loan between $625,500 and $729,750, you have a relatively short period of time to act. Pricing is quite attractive, 4.875% for 30-year fixed, 4.125% for a 15-year fixed, 3.75% for a 10-year fixed, and 3.375% for a 5/1 ARM. These are approximate but very close enough to reality to rely upon.
For those with loans greater than $729,750, the “real Jumbo” market is returning. Rates are higher than those above, but it is no longer so high as to ignore it, as it was six months ago.
I think that the other thing to keep in mind is that there are going to be significant changes in the mortgage business in the next few years as the government unwinds its interest in Fannie and Freddie. We also have to figure the answer to the long-term problem of how to monetize the trillions of dollars of Federal government shortfall in a world that is not healthy economically.
Add to that the short-term problems that erupted in Japan. They may need to generate 2 trillion in cash to rebuild their shattered country. They hold nearly $900 billion in U.S. Government debt and no doubt they would like to turn a lot of that into Yen to pay for rebuilding. That means they will be selling those bonds. Is the Fed going to buy them back by printing more money?
Bottom line, the world is still looking at a rutted road ahead. Remember the old sign from the horse and buggy days that said:
“Choose your rut carefully. You will be in it for a long time.”
Image: Trevor Blake, via Flickr.com