Higher Loan Limits In '05
by Lew Sichelman
The conforming loan limit for one-unit dwellings in 2005 will be $359,650. But as usual, many lenders aren't waiting until the new year to take advantage of the 7.8 percent increase in the ceiling, which is currently $333,700. Countrywide Home Loans began taking applications at the higher limit yesterday, the same day it was announced. And Bank of America (BofA) began doing the same today. BofA also said it would allow all pending customers who had opted for a float-down option to take advantage of the new maximum. "By accepting the new limit, many of our customers whose loan amounts exceeded the previous loan limit will now have the opportunity to save money too," said spokesman Dan Frahm. The conforming loan limit is one of the most closely watched in the mortgage and financial markets. It is the ceiling on loans that can be purchased by Fannie Mae and Freddie Mac, the two giant government-chartered financial institutions which maintain liquidity in the mortgage market by purchasing loans made by local lenders, packaging them into securities and selling them to investors worldwide. Lenders typically charge anywhere from 0.25 to 0.5 percentage points less for loans that are sold to Fannie Mae and Freddie Mac than they do for so-called "jumbo loans" that are above the ceiling. They can charge less because the investors who ultimately purchase the loans on the secondary market require a somewhat lower yield in the belief that the mortgage-backed securities created by Fannie and Freddie are backed by the full faith and credit of the U.S. government. Whether that's actually the case remains to be seen. Nevertheless, American home buyers reap the rewards in the form of lower loan costs. According to Freddie Mac, the total mortgage interest savings for a borrower with a 30-year fixed-rate mortgage at the new conforming loan limit will be as much as $24,800 over the life of the loan. The higher limit isn't likely to create many new buyers because most who can afford houses in that price range would probably have proceeded whether their loans are any less expensive or not, mortgage specialists agree. Still, Freddie Mac estimates that 340,000 borrowers will benefit from lower cost financing next year. Not included in that number are thousands more households who use government financing to buy a new home or refinance their current one. Under a bill sent to the White House earlier this month, the Veterans Administration loan guarantee will be pegged to 25 percent of the conforming loan ceiling, or $89,912.50 in 2005. So if the President signs the non-partisan legislation, as he is expected, eligible service personnel will be able to purchase homes costing $359,650 without a downpayment. Veterans could still purchase higher-priced houses. But because the VA "guaranty" is accepted by most lenders as a substitute for a 25 percent downpayment, buyers would have to put up $1 of their own money for every $4 they want to borrow above the conforming loan limit. The ceiling on loans insured by the Federal Housing Administration also will rise next year, to as much as $312,896 (87 percent of the Freddie Mac limit) in about three dozen high cost areas. The FHA "floor" in 2005, or the maximum loan amount in most other places, will be $172,632 (48 percent). But in about 650 jurisdictions, the maximum will be somewhere in between. Because the Department of Housing and Urban Development calculates the limit for more than 3,000 individual jurisdictions, the exact figure for next year won't be announced until late December at the earliest. FHA financing is considered a last resort for borrowers who don't measure up to Fannie and Freddie's stricter underwriting guidelines. Mortgages insured by the FHA are a little more expensive than conventional loans backed by private insurers. But the typical FHA borrower doesn't earn enough or carries too much debt to qualify for a loan that meets Fannie and Freddie's requirements. The only other choice is the subprime market, where lenders charge rates that are often several percentage points higher than even FHA rates. Neither Fannie Mae, Freddie Mac, the VA or the FHA make loans directly to consumers. Fannie and Freddie are government-sponsored enterprises which guarantee the timely payment of principal and interest to investors. The FHA insures loans made by private lenders, and the VA guarantees to make lenders whole should borrowers default on their loans. Set for the first time by the Office of Federal Housing Oversight, the new Fannie-Freddie ceiling takes into account the fact that the two secondary market giants failed to make a $2,300 downward adjustment in average housing prices when calculating the 2004 ceiling. Normally, Fannie and Freddie handle the calculations themselves. But because last year's "procedural" error, OFHEO stepped in. To determine the '05 limit, OFHEO recalculated the current ceiling down to $331,400 to take into account the one-time adjustment the agencies didn't make last year. That adjustment was necessary to "maintain comparability" with changes in the house price index on which changes in the limit are based, the regulator said. Had OFHEO not incorporated that adjustment, the limit would have been close to $362,000 in 2005 The limit is based on housing prices from one October to the next as determined by the Federal Housing Finance Board. The average for both new and existing homes in October was $264,540, up 8.53 percent from $243,756. Neither GSE agonized over the somewhat lower ceiling. Indeed, both had exactly the same reaction: "It is what it is," a spokesperson for each company said. "They said all along what they were going to do, and that's what they did," said Fannie Mae's Janis Smith, noting that most of her company's loans are well below the maximum. Despite OFEHO's slap on the wrist, the increase is "certainly consistent with what we're seeing in home price appreciation nationwide," said Freddie Mac Chief Economist Frank Nothaft. However, Jim Hamilton, president of the California Association of Realtors, complained that the new ceiling is not nearly enough to help buyers in high-cost states like his. The median housing price in the Golden State is $460,370, or 28 percent higher than the new conforming loan limit, Hamilton pointed out. | 
