‘Jumbo’ Mortgages to Cost More : Loans: Lowering ‘conforming’ limit, effective Jan. 1, will force new borrowers to pay higher interest rates.


Action last week by two huge agencies will raise mortgage rates for many borrowers across the United States, including thousands of home buyers in California.

On Tuesday, both the Federal National Mortgage Assn. and the Federal Home Loan Mortgage Corp. announced that on Jan. 1 they will lower the dollar limit on loans they buy from lenders to $187,450. Rates on so-called “conforming” loans--mortgages for that amount or less--are usually about half a percentage point lower than rates on nonconforming or “jumbo” loans.

It was the first time in history that the two agencies reduced their limits, which are adjusted annually based on an index calculated by the federal Office of Thrift Supervision. The current limit is $187,600 and was expected to rise to about $200,000--a level that would have meant lower rates for many more buyers in high-cost housing states.

For example, if the limit had been raised to $200,000 and a home-buyer borrowed the maximum at the current conforming rate of 9 3/4%, principal and interest payments on the the loan would total $1,718 a month.


Now, however, that borrower would have to take the higher, nonconforming rate of 10 1/4%. Monthly payments on the $200,000 loan would total $1,792, an increase of $74.

In California alone, the reduction in the Fannie Mae and Freddie Mac loan limits are expected to force about 37,000 buyers next year to pay higher rates because they’ll need to get a jumbo loan instead of a conforming loan, according to estimates prepared by the California Assn. of Realtors.

The lower loan limit “will prevent thousands of Californians from purchasing homes at a lower cost, expanding the state’s affordability crisis,” said Jim Antt Jr., a Bakersfield realtor who will serve as the realty trade group’s 1990 president.

The reduction will have its biggest impact on buyers in Los Angeles, Orange and other counties where home prices are unusually high, Antt said, because those are the areas where large loans are needed to purchase a house.


The impact will be far less in Riverside, San Bernardino and other lower-priced counties. That’s because buyers in those areas usually don’t need to borrow more than $187,450, so they’ll be able to get the lower rate that conforming loans provide.

Annual adjustments to the Fannie Mae and Freddie Mac loan limits are based on data compiled by the Federal Housing Finance Board, which looks at changes in home prices from one October to the next.

The board said the average home purchase price in October was $136,800, down from $136,900 a year earlier. The figures provided further evidence that home prices in many parts of the country are dropping, and simultaneously triggered the reductions in the loan limits.

Ironically, prices in most previous months had been increasing, raising hope among realtors and many lenders that the loan limits would also rise sharply. However, the federal government requires that the annual ceiling adjustments be based on October-to-October changes only.

Fannie Mae and Freddie Mac buy loans from lending institutions, pool them with other loans, and then sell shares in the pools to investors.

The money investors pay for these shares and related securities gives Fannie Mae and Freddie Mac more cash to buy more mortgages, which in turn gives lenders more money to make home loans.

The new $187,450 limit is for single-family conventional mortgages only, but limits on buildings with two to four units were also slightly reduced.

The ceiling for loans on two-family homes, such as duplexes, was cut to $239,750; the limit on loans for three-unit properties was reduced to $289,750. The limit on loans for four-unit buildings was scaled back to $360,150.


The maximum loan amounts for one- to four-unit buildings in Alaska and Hawaii are 50% higher than those for other parts of the country, even though prices in many parts of California and some other states exceed values in the non-contiguous states.

The loan limits for second mortgages was reduced to $93,725, with $140,550 the new ceiling for second mortgages on property in Alaska and Hawaii.