- The Washington Times - Friday, February 8, 2008

The economic stimulus plan supposedly being ironed out in Congress calls for various incentives and rebates designed to put some money in people’s pockets so they can spend it and boost the economy. One provision, if adopted, could prove to be a boon to folks who are seeking or have a jumbo mortgage.

The current conforming loan limit is $417,000. Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac), the two giant government-chartered companies that buy and package mortgage loans from banks, are not allowed to purchase loans over this limit.

Although interest rates have fallen dramatically in recent weeks, creating a sudden refinancing wave, folks with jumbo mortgages are unable to take advantage of this opportunity even if they have great credit and plenty of equity in their home.

The problem is that the subprime mortgage meltdown and subsequent spillover into the entire mortgage arena has left Wall Street with a bitter taste in its mouth when it comes to investing in residential mortgages.

Lenders offering jumbo loans must rely on Wall Street investors to purchase mortgage-backed securities made up of jumbo loans. Because Wall Street has developed a distaste for jumbo loans, rates on these programs have not fallen nearly to the levels of conforming loans.

Traditionally, the spread between conforming and jumbo money has been only about 0.25 to 0.5 percent. Not anymore. Today, the 30-year fixed rate on the popular zero-cost refinancing program for a $300,000 loan is pushing 5.875 percent, nearing the 40-year lows of 2003 and 2004.

Historically, the rate for a jumbo loan for the same 30-year fixed-rate zero-cost refinancing might be 0.5 percent higher, at 6.375 percent, at the most. Today, I would be quoting 7.25 percent for the same zero-cost refinancing if the loan amount exceeded $417,000.

The Bush administration’s stimulus plan calls for a temporary increase in conforming loan limits to $729,750. Although the plan calls for the increase only until the end of the year, jumbo mortgage holders finally could take advantage of the recent drop in long-term interest rates.

A Senate vote on the measure could come this week, but differences between the House and Senate versions would have to be reconciled.

Consider this: A $500,000 loan at 6.5 percent, refinanced to 5.875 percent, would save more than $200 per month. We’re talking $200 per month, every month, for as long as you hold the mortgage.

The $600 to $2,000 one-time tax rebate that proponents of the package are emphasizing is chump change compared to what would go into the economy if these loan limits were raised.

Holders of jumbo adjustable-rate mortgages especially would get relief. As their adjustable rates move into the mid-7 percent range, the only refinancing alternative is to convert to a fixed rate without a significant rate drop.

The painful pinch of the payment shock is unavoidable. If these folks could refinance to the conforming rate level, any payment shock likely would be minor.

Some in the Senate reportedly oppose the increase because they fear it would result in more bad loans.

They’re wrong. They are mixing up two issues. The easy mortgage money of the past several years is largely gone. This is a good thing. Lending money to folks who intrinsically can’t afford the debt is what got us into this mess in the first place.

Folks who have good credit, good jobs and plenty of equity should not be prevented from taking advantage of low long-term interest rates just because their loan balance exceeds $417,000.

Raising the conforming loan limits doesn’t mean a re-emergence of easy mortgage money. It means folks who can truly qualify and afford a jumbo mortgage can reap the benefits of the drop in rates.

Let’s hope Congress passes this part of the stimulus package and makes it permanent.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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