The so-called lending pipeline that has been clogged for so long, considered by many a top reason for lackluster home sales, may get worse come October — or possibly sooner.
The federal government has decided the size of loans eligible for government backing will go down in October. That's a step back from a temporary hike made three years ago, when Congress raised the maximum loan guarantee that Fannie Mae, Freddie Mac and federal agencies aimed at boosting the beleaguered market.
That move three years ago to hike the conforming loan limit made it cheaper for borrowers in more expensive housing markets to get mortgages, thanks to government guarantees that investors will receive payments on those mortgages, even if homeowners default. The change will take the maximum down from $729,750 to $625,500 in the more expensive housing markets.
Homeowners with loans too large to qualify for government-backed mortgages must seek a jumbo loan. Jumbo loans typically have higher interest rates and larger down-payment requirements.
With the federal government's pullback from the lending market, some experts believe it could mean less people will qualify for jumbo loans, and they say now, when the housing market continues to languish for an extended period, may not be the best time to do this.
It also begs the question: Because so many Orange County properties seem to be within this range, could the area be more impacted than other Southern California regions?
"I think the buyers that are right at the $625,000 to $729,000 range will be affected most," said Cas Pinkowski, branch manager of Coldwell Banker Residential Brokerage in Newport Beach.
Pinkowski said he is encouraging as many people as he can to lobby their Congressional representative to vote for an extension on the higher loan limits.
In fact, some lenders are already warning borrowers that they will stop accepting applications for loans that exceed the new limits sooner than Oct. 1 to ensure that the loans are funded before the cutoff date.
"We heard that very report this morning from our in-house lender," Pinkowski said.
However, some experts think the impact on the Orange County market will be limited.
"The median list price in Orange County is about $425,000, so well below the new $625,000 limit and therefore un-impacted by the loan limit reduction," argued Dennis Smith, the co-owner and broker of Huntington Beach-based mortgage firm Stratis Financial. "Around 75% of homes on the market in Orange County are listed at or below $665,000.
"This means about 75% of the current sales market will not be impacted. This may lead one to conclude that any home it the market above $665,000 will feel the impact, but this is not the case as those above about $800,000 will not feel any impact, as they are not impacted by the current loan limits so they will not be impacted by the new ones."
Though, it's the market between about $650,000 and $665,000 to about $800,000 that will feel the impact, much of coastal O.C. sees far-higher prices, particularly in Newport Beach, Laguna Beach and certain swaths of Huntington Beach.
Still, Smith acknowledges that lenders are starting to action now in anticipation of the Oct. 1 deadline.
"Our understanding, and what we are hearing from many lenders, is that the loan limits take effect Oct. 1, so any loan funded after that date will not be eligible for delivery to Fannie or Freddie or to be insured by (Federal Housing Authority)," he said. "For mortgages to be funded by end of business Sept. 30, they must be in the lenders' pipelines in time for underwriting, condition sign-off, document preparation and funding."
And anyone who waits until the last-minute risks losing their loan commitment and may need to seek alternative financing, Smith warned.
"My advice to anyone who is considering a loan above the $625,000 mark is to have your application in process and submitted with appraisal and all other required documents prior to Sept. 15," Smith said. "Any later and they may get in a logjam as we saw last year with the flood of applications trying to beat the expiration of the homebuyers' tax credit."
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