Tuesday, December 9, 2008

The window is rapidly closing for some borrowers to take advantage of this year’s big increase in the size of mortgage loans that can be bought by Fannie Mae and Freddie Mac, and still qualify for a much lower interest rate.

On Jan. 1, the limit of these so-called conforming jumbo loans in the Washington area is scheduled to decline from $729,750 to $625,500.

This reduction will significantly raise monthly payments for 30-year fixed-rate mortgages in this range.

This lower limit could also exert downward pressure on Washington-area home prices between $650,000 and $800,000, according to Brian Bonnet, president of Signature Mortgage Services in Alexandria.

“It’s possible to do a loan, particularly a refinance, by the end of the year, but it’s not very easy to do,” said Guy Cecala, publisher of Inside Mortgage Finance.

“It’s very difficult to close a loan in 30 days,” said Keith Gumbinger, vice president of HSH Associates, a financial publisher. “Unless you are absolutely ready to go when filling out the application, the window is already closed.”

To cover the additional risk involving the uncertainty of demand for the conforming jumbo mortgage after Dec. 29, Mr. Bonnet said some lenders were charging a “price adjustment” of 1.75 percent of the loan to guarantee the conforming jumbo interest rate for mortgages closed between now and Dec. 29.

If a borrower manages to meet the deadline and purchases a $800,000 home by making a Fannie-conforming down payment of 10 percent and by borrowing $720,000, the loan would qualify as a conforming jumbo mortgage. As such, it would be eligible for a 30-year fixed interest rate of 6.11 percent, according the HSH Associates.

However, if the buyer misses the deadline, he or she will encounter several problems. Beginning Jan. 1, loans between $625,501 and $729,750 will no longer qualify as conforming jumbo loans. As a result, the borrower may not meet the more stringent underwriting standards, which would likely include a substantially higher down payment.

If the borrower were somehow able to obtain a $720,000 loan after the deadline, it would bear a nonconforming jumbo 30-year fixed rate. That rate recently stood at 7.49 percent, according to HSH Associates. The difference in the monthly mortgage payment (6.11 percent versus 7.49 percent) for a $720,000 loan would be $661.

Jumbo mortgages have undergone big changes in recent months.

For years, a jumbo loan was simply a mortgage that exceeded the conforming limits of Fannie and Freddie. For 2006 and 2007, that limit was $417,000. Fannie and Freddie, which own or guarantee more than half of the nation’s mortgages, could not purchase these jumbo loans above $417,000, which generally carried an interest-rate premium of one-quarter percentage point.

The jumbo premium was so low because a huge secondary market existed for jumbo loans, which were bought by investment banks and packaged for sale to private investors.

“In October 2007, Wall Street’s securitization of jumbos collapsed,” Mr. Gumbinger said. “The risk of jumbos increased because banks had to retain them in their portfolios.” The jumbo premium jumped to 1 percentage point and higher.

In February, Congress raised the maximum limit for conforming loans by 75 percent to $729,750. The new maximum was based on prevailing home prices and applied only to select markets, such as San Francisco and the D.C. area. In Baltimore, for example, the conforming limit was increased to $560,000. In most areas of the nation, the $417,000 limit wasn’t increased at all.

In high-cost areas such as Washington, loans between $417,000 and $729,750 became known as conforming jumbos. Loans above $729,750 were known as nonconforming jumbos.

Because a $720,000 loan in a high-cost area could now be purchased by Fannie or Freddie, the premium fell significantly. The 30-year fixed rate for a conforming-jumbo loan of $720,000 was 6.11 percent, a quarter-point higher than the 5.86 percent rate for a $360,000 conforming loan, HSH Associates reported.

Fannie and Freddie cannot purchase nonconforming jumbos (mortgages above $729,750), which now carry premiums of 1.4 percentage points and higher.

Legislation passed in the summer reduced the nonconforming jumbo limit to $625,500 effective Jan. 1. In addition to carrying a much higher interest rate, loans above that amount must meet tighter credit standards. These might include a down payment of 20 percent or more, a credit score of 750 or higher and a debt-to-income ratio as low as 30 percent, Mr. Cecala of Inside Mortgage Finance said.

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