Expansion of Loan Limits to Help Borrowers

The American Recovery and Reinvestment Act (ARRA)
was signed into law on February 24, 2009. This
act increased the maximum conforming limits for
loans eligible to be purchased by Freddie Mac
(FHLMC) and Fannie Mae (FNMA).

Last year, the Stimulus Act allowed FHLMC and
FNMA to purchase loans above the traditional
conforming limit of $417,000. In San Diego
County, the limit for a single-family home
was $697,500. Some counties had maximums of
$729,750 which was the absolute limit for all
states other than Alaska and Hawaii.

Then in late 2008, the limits were re-assessed,
and the San Diego County limit for 2009 was
set at a maximum of $546,250.

And now, in an attempt to loosen up lending,
and make some more opportunites available to
borrowers, the ARRA is now allowing the higher
of the Stimulus Act limits and the revised
limits for 2009 to be in effect.

So, going forward, the limits for San Diego
County are as follows:

1-family property $697,500
2-family property $892,950
3-family property $1,079,350
4-family property $1,341,350

This means that loans which were previously
categorized as jumbo loans, and whose availability
have been restricted due to lack of investor interest
through Wall St., can now have more competitive
rates and terms. It also means that money is more
available for these loan amounts.

We are awaiting for the enabling regulations to be
formulated through FHLMC and FNMA, and for the lenders
to announce their willingness to create these loans
for ultimate sale to these agencies.

We have some experience with the underwriting guide-
lines for these loans from last year, but there could
be new guidelines, requirements and restrictions that
are different from what was previously established.

Borrowers can expect to see at least three tiers of
loan categories, pricing (interest rates and loan
fees), and guidelines:

Conforming loans: These would be the traditional
loans with a maximum of $417,000. This is the
mainstream product that FHLMC and FNMA were created
to facilitate and that offers the best pricing.

Conforming-jumbo loans: These are also known as
Agency Jumbo and High Balance Conforming loans. This
is what the new ARRA is allowing the increase from
$546,250 to $697,500 in San Diego County.

These loans tend to have higher pricing models, and
have more restrictions than the conforming loans. The
higher pricing and restrictions are indicative of the
fact that there is higher risk to FHLMC and FNMA for
purchasing these loans.

Jumbo loans: These will be the loans above $697,500 in
San Diego County. Availability of funds for these
loans will come from lenders who have the capacity to
create them for their own loan portfolio (meaning that
they do not intend to sell them to other investors), or
who are relying on outside investors to purchase the
loans from the lender.

Because of the losses that have occured in mortgage
investments, we have seen a reluctance of Wall St.
investors to purchase the mortgage-backed securities
that are created from jumbo loans.

This lack of availability has made for a very stagnant
market in the jumbo category, and when funds are
available, the pricing has been very high.

For those of you who have loans between $546,250 and
$697,500 in San Diego County, now would be a good time
to initiate a conversation about possibilities for
improving the terms of your mortgage.

Of course, if you are seeking financing for a new home
purchase, you can now expect better terms for loans
between those two loan amounts.

Give me a call to discuss what may be the best course
of action for you and how to take advantage of the
new lending programs and guidelines.

Glimmers Of Hope

As we work our way through the tightened approval
standards that the mortgage underwriters are
adhering to, we keep looking for the positives
that peek out from time to time.

First, interest rates are still staying low.
For the most part, conforming loans (up to
$417,000) for primary residences are in the 4.75%
to 5.0% range with a loan fee of one point.

Conforming jumbo loans (those between $417,000 to
$546,250 for San Diego County) are in the 5.25% to
5.5% range with the same one point loan fee.

Second, although it does not apply to the broadest
array of borrowers, Freddie Mac (FHLMC) and Fannie
Mae (FNMA) have relaxed a restriction regarding
the number of mortgaged properties a borrower can
own and still obtain a loan targeted to FHLMC and
FNMA.

Specifically, the previous restriction was that
a borrower could not obtain a FHLMC or FNMA targeted
loan if they owned more than 4 mortgaged properties.

The new limit is that the borrower may now own up
to 10 mortgaged properties and still obtain a new
loan targeted to FHLMC and FNMA.

This gives us some idea that as the underwriting
pendulum has swung from extremely lax (before the
mortgage meltdown became prevalent) to extremely
conservative (where only the most qualified borrowers
and least risky loans are being approved) that
there is some realization that there is room to
be a bit less conservative.

Third, we have seen some relaxation of add-ons to
loan pricing models in some cases.

Let me give a recap of how loan quotes (interest
rates and loan fees, also known as "price") are
determined.

We receive loan pricing quotes from our lenders
daily, and frequently receive mid-day changes as
the financial markets ebb and flow.

There is a base rate offered to us for each loan
program, and variations from that base for higher
rate/lower fee or lower rate/higher fee combinations.

In addition to these base rates and variations, there
are specific adjustments to the rates and fees for
various risk-based factors.

A few of these would include:

Loan-to-value (LTV) adjustments. A higher loan in
relation to the value of the home is priced higher
than a lower loan in relation to the value. For
example, a 60% LTV is less costly than a 70% LTV
which in turn is less costly than a 80% LTV.

Credit Score adjustments. The pricing models give
preferential results for scores of 740 or higher.
If the score is between 720 to 739, the pricing is
a bit higher. Other pricing differences exist for
the 700-719 category (still higher) and from 680-699,
(and higher yet).

Purchase loans vs. refinances. Purchase loans get
the best terms under the pricing models, refinances
where the borrower is not seeking cash from the equity
of their home are next, and cash-out refinances may
be the most costly.

Type of property: Single family homes are regarded
as less risky than condominiums, and the pricing
models show than condos have higher pricing. If the
property is 2-units, 3-units, or 4-units the pricing
is higher for these scenarios than for a residence.

Occupancy: There is significantly less risk for a
lender when they lend on a primary residence for the
borrower. Statistically, rental properties have a
higher default rate than a person's home (with all
other factors being equal). The pricing for a rental
property is quite a bit higher than an owner-occupied
home.

Loan amounts: Conforming loans (up to $417,000) are
priced better than conforming-jumbo loans (those
between $417,000 and $546,250 in San Diego County)
which in turn are much better than jumbo loans (those
above $546,250 in San Diego County).

There are other risk-based factors that could affect
the loan quotes.

Specifically, the improvment that we have seen is
that some of the pricing add-ons for some instances
in the conforming-jumbo category have been reduced.

Again this may be some recognition that things need
to be a bit more affordable to help borrowers obtain
financing in this market.

As always, give me a call to discuss your specific
circumstances. There are too many "moving parts" to
generalize a solution for everyone. We can make
sure you get customized answers for your situation.