The Sky is Falling! (and so are loan limits)

There are more changes coming to the residential lending world (all those surprised by that, please stand on your head and whistle).  The Fed is maintaining the conforming loan limit of $417,000, but is lowering the non-conforming, conforming loan limits.  The what now?  A little background might help: in 2008 Fannie Mae’s charter was expanded to allow loan amounts in high cost areas (such as San Diego… yeah us!) to exceed the nationwide conforming loan limit of $417,000.  The most recent loan limit in San Diego County has been $697,500, thus making it exceedingly difficult for those of us who toil away in the real estate salt mines of America’s Finest City to keep beautiful San Diegans housed in the luxury to which they have become accustomed…

But as of October 1, the limit is dropping; in San Diego County it will be $546,250 and some wonder if this isn’t just a stepping stone on the way down to the original $417,000! 

As you might imagine, there is a long list of people who do not like this decision.  The National Association of Realtors has sent out an Emergency “Call for Action” message in response, suggesting “… a housing recovery depends on keeping mortgages affordable” and warning this decrease in loan limits will “make creditworthy borrowers unable to access affordable financing” (emphasis mine).  This raises an interesting question:

Should the government be providing affordable financing in high cost areas?

Hold on, let me ask that again, with a little more accuracy:

Should you and I be subsidizing mortgages for people buying $800,000 homes?

Wait… don’t answer that.  We don’t want to be insensitive to the needs of my fellow San Diegans and we certainly don’t want to interfere with the ongoing success of the ”housing recovery.”   Let’s move on to the good news:

With the Fed in charge of “high cost” loans and a market unsure what the Fed might  do next… well, they were kind of the elephant in the room; there was no space for anyone else, which meant that until very recently, there were no true Jumbo loans to be found.  (Unlike jumbo shrimp, a jumbo loan actually means what it sets out to mean: a loan amount larger than Fannie Mae’s conforming – or in this case non-conforming, conforming – limits.)  If you were buying a home for, oh… let’s say $1.5 million, you had better pony up something close to $1,000,000 of the purchase price to get any financing at all.  How’s that for not providing access to affordable housing?

But something strange happened when the government decided to shrink its involvement in the “high cost area” loan market:  Actual, bonafide, free market lenders came roaring back.  What’s that mean for a quiet little outpost like San Diego County?  It means you can get a loan for much, much more than $697,500 now; you can get a loan for $2 million, $3 million, even $4 million!  Imagine that: just a couple of months ago these loans did not exist and then: “poof”, as if by magic, they’re back.  “Oh sure,” you’re thinking, “these loans might exist again, and that’s nice, but what’s the rate?  Can I even count that high?  Do I want to count that high?”  Surprisingly enough, if you can count into the 5′s, you can master the rates on these true Jumbo loans!  So what’s the catch?  The catch is this: these are actual loans originated by actual lenders, which means they expect the buyer to put 25% or even 30% down. They also expect the buyer to have a very good credit score.  What!  Those evil banks; is that what they call “access to affordable financing”?  No, it’s what they call a risk assessment, and a surprisingly inexpensive one at that.

So, while some bemoan the lowering of the non-conforming, conforming loan limits, may I suggest that we celebrate?

  • Celebrate the reawakening of lenders who provide loans that may not be common, but are needed; especially for the move-up market.  Can stated income loans be far behind?  (Is there anyone who doubts the validity and need for stated income loans?)
  • Celebrate common sense underwriting standards that stabalize home prices, rather than placing under-qualified homebuyers into homes because “we keep financing affordable,” no matter the consequences.
  • And maybe, just maybe, we can celebrate this as a how-to example of what actually helps the housing market. 

The Fed is lowering their loan limits and moving out of the Jumbo loan market… that’s the best real estate news I’ve heard in quite a while!

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