My good friend, Mark Brunelle; fellow sailer and mortgage guru at Chase Bank has articulated the roll-out of the increase in loan limits.
“The Office of Federal Housing Enterprise Oversight, which regulates Fannie
Mae and Freddie Mac, announced it plans to remove the portfolio growth caps
for both companies on March 1. The shares of both government-sponsored
mortgage giants surged on the announcement, and were recently higher by
about 12% each.
This is significant because the two agencies were operating at over 90% of
their caps. Should they be suddenly open to the market for $417k to $729k
loans, it wouldn’t take much for the caps to be breached, which in turn
could shut off their capacity for new loans. OFHEO’s action isn’t a major
newsmaker but it’s an important link in the chain to some housing relief
from the lending side.
Rules are changing like we’re in a Road Runner Cartoon. “Beep Beep” and
suddenly you’re Wiley Coyote with an anvil on your head. Last month we had
90% CLTV loans with Stated results. Now there are no stated seconds at all.
Next month, there won’t be any 90% seconds. Each company in the industry
has subtle (and not so subtle) revisions, so keeping up is a full time job.
The rate of change will be even heavier when the loan limits do come into
play because the agencies will need to apply risk management to the new
What’s likely when the increased limits are finally ready for prime time:
Higher rates. This will come in the form of higher fees. It occurred to me
that we might see staggered fees, say around $600-$625k. The end result
might be something like a quarter point higher rate for up $600ish, then
3/8ths higher on the rate for the next tier, to $729,900.
Tighter guidelines: I haven’t seen anything on this, but having stricter
standards to get Stated/Stated findings is likely. These will be part of
the automated underwriting algorithm so you probably won’t see guidelines
but you’ll get the sense that some people who were stated/stated at $417k
might be getting full doc at $650k. You’ll also see stricter total debt
ratios needed in the automated decisions. Right now, there’s no effective
cap on ratios, the decision is balanced among several other risk factors
with tremendous weight given to credit score and LTV. I wouldn’t't be
surprised if we started seeing a hard ceiling at between 45-48% on debt
Lower LTV’s: There’s no information about this either, but the agencies
are increasingly sensitive to declining market indicators, which currently
limit maximum financing on any given program to 5% lower LTV’s. Right now,
what used to qualify for 5% down needs 10% down if the area is determined
to be declining. Expect another 5% LTV reduction for the higher limits and
I can’t imagine them doing anything at 100% even in markets that are not
What’s left? First and foremost is the consistency that comes with a
Fannie/Freddie loan. Plenty of liquidity for the product on the secondary
market. Next will be a better spread between today’s jumbo fixed and these
loans. Even with the ticket price higher than regular conforming, they’ll
still be 3/8ths to 5/8ths less than the current jumbos. Finally, these
loans will be far less susceptible to the “now you have it, now you don’t”
approvals we hear about that make us all work harder and look dumber.
Finally, those ideal, middle class, professional who wants and needs a nice
3 bedroom, 2 bath home in a good neighborhood, will be able to get one with
5-10% down and with a decent rate. They’ll need good credit and verifiable
jobs with good incomes, but the money will be available.” Mark Brunelle, Chase Mortgage Services
During the next month or so, lenders will be able to price these new products. The price of homes in Walnut Creek and surrounding areas are a perfect fit.
As I have said in the past few weeks, this may be the time to list your home. This may also be time to start the buying process. If we are not careful, we will be in a market with little inventory. That’s not a good idea.
Buyers and sellers here’s an incredible real estate window.