Thoughts on a higher loan limit
An economic stimulus plan now working its way through Congress would temporarily raise the limit on the size of conforming mortgages by upward of $200,000. Raphael Bostic, an associate professor at the USC Lusk Center for Real Estate, offers his views about how this may benefit buyers and improve the housing market. Here is an edited transcript of his comments:
Question: Can you explain what a conforming loan is?
Answer: A conforming loan is one that can be purchased by Fannie Mae or Freddie Mac, government-sponsored companies that buy large amounts of home loans. They then package some of them into mortgage-backed securities, which are sold as guaranteed investments.
The issue here is that the government defines the size of the mortgages Fannie and Freddie can buy. Currently, that cutoff amount is $417,000. Loans that are larger than that, called jumbo loans, cannot be purchased by Fannie and Freddie. Jumbo loans typically have higher interest rates than conforming mortgages, because they’re riskier to lenders who, without government guarantees, have difficulty selling them to the secondary market.
Question: How would higher conforming loan limits benefit California home buyers?
Answer: California home prices are higher than those in many other states. The real benefit is that expensive homes won’t cost as much in monthly payments, because you’ll have a lower interest rate. For example, someone borrowing $500,000 at 6.5%, which is the current jumbo rate, would save about $330 a month, if they could borrow at the current conforming rate of about 5.5%.
Question: People are losing their homes because they can’t afford them. Doesn’t this just mean they can buy a bigger house that they can’t afford?
Answer: Lenders have significantly changed their underwriting requirements, so that borrowers don’t have access to the high-priced homes unless they have considerably stronger profiles.
Question: With Southern California prices still high, will the proposed loan limit be enough to help most buyers?
Answer: Home prices are still expensive. That’s going to be true regardless of the loan limit. So for many buyers, the general prices here will still be out of reach.
Question: Assuming loans are based on a borrower’s income, their debt and how much they have for a down payment, how will the new loan limits help them?
Answer: This is an interesting part of the proposal that still hasn’t been resolved. Namely, the other characteristics that borrowers will need to qualify for these new conforming mortgages. For example, if credit-score requirements don’t change, many borrowers will not be eligible for the new pricing. California underwriting has been different than in the rest of the country. Housing is more expensive here, so people have been more likely to use more of their income on housing. It’s possible there will be changes, such as allowing flexibility on income requirements.
Question: How many buyers do you think the new policy will affect?
Answer: It could be substantial, because the lower mortgage prices will make housing more affordable for a lot of Californians. Qualifying for a conforming loan could translate into increased demand for homes. Out of the whole stimulus package, moving the conforming limit is perhaps the most important proposal.
