Top 7 Reasons The Conforming Loan Limits Need To Be Increased PermanentlyEd Craine
July 2, 2008 — 1,582 views
The Economic Stimulus has successfully passed, and within weeks we’ll know how high the conforming loan limits will be for each Metropolitan Statistical Area (MSA). HUD is scheduled to publish these new limits by the middle of March. The new loan limits will be based upon the Median Home Value of each MSA. Although the limits will be determined soon, it will likely take lenders into the summer, before they are ready to offer these new loan products.
For hundreds of thousands of homeowners and potential buyers in areas where the median home value is more than $417K, this temporary increase will bring with it some truly amazing opportunities. But, because the increase is currently only scheduled to remain in effect until the end of 2008, the potential boost it will bring not only to the housing market, but to the overall economy, will be short lived. That is, unless these increases become permanent, in which case, the entire economy stands to gain a great deal of stability.
Here are the top 7 reasons the conforming loan limits should be raised permanently.
1. Levels The Playing Field For People In High Cost States.
Allowing homeowners in a high cost state such as California, to have access to loans with competitive interest rates is only fair. Why should someone in California be forced to pay higher interest rates on their mortgage loan than someone living in the Midwest? Consider two families decide to buy a home. One lives in the San Francisco Bay Area, and one lives in Cleveland. The homes are almost identical in amenities, size, etc.
Although the homes are almost identical, not only will the buyer in Cleveland pay far less for their home, but they’ll also get a lower interest rate (all credit scores, down payments, etc., being equal.) By permanently raising the conforming loan limit at least the playing field will become less imbalanced-although the price will still be higher for the buyer in San Francisco.
2. Encourages First Time Home Buyers To Purchase
When first time home buyers are able to obtain a conforming loan, there is a lot more incentive to purchase a home, than when they are forced to obtain a jumbo loan. Conforming loans can be obtained through Fannie Mae and Freddie Mac (known as GSEs or Government Sponsored Entities.) These GSE lenders are generally considered to be “safe” places to obtain loans from, because they offer sustainable loans that are well underwritten. The opportunity for first time buyers to finance a home through one of these “safe loans” will undoubtedly bring new buyers into the housing market. But those buyers shouldn’t be forced into making such a large purchase within such a limited amount of time.
3. Rejuvenates the Buying Market
With all of the turbulence that the mortgage market experienced last year, many people who had the desire to purchase a larger, newer or different home, opted not to, for fear that it was a “bad market.” Who can blame them? Rates on jumbo loans went up, and those who wanted to upgrade, or simply move to a different neighborhood balked, and decided that it was just too risky. However, with home prices down, and the opportunity for so many to obtain a loan at a reasonable rate, the home buying market should experience noticeable gains in interest from those who are still eager to upgrade, or relocate. But again, those people will be forced to act extremely quickly, before the limit increase expires.
4. Will Allow Current Homeowners To Refinance at Reasonable Rates
Homeowners, who purchased a home and obtained an Adjustable Rate Mortgage (ARM) or an Option ARM, may be able to refinance into a loan that will not increase month after month. Of course, homeowners seeking to refinance into a fixed rate loan will need to have equity in their home, and solid mortgage payment history. By making the increased limits permanent, these homeowners have extra time to build equity, and show their solid mortgage payment history.
5. Will Staunch The Flow Of Foreclosures
Further to the end of homeowners being able to refinance into mortgage loans with reasonable rates, this increase in the loan limit should help to staunch the flow of foreclosures we are currently experiencing. High numbers of foreclosures serve only to have a negative, long term impact on the overall health of the housing market, and subsequently, the economy. Preventing even one home from going into foreclosure will help in healing our overall housing market.
6. Will Inject Money Back Into the Economy
When people are able to save money by refinancing into a mortgage loan which has a reasonable interest rate, they will presumably be saving money each month. That money can then be reinvested in any number of arenas, ranging from the stock market, to retirement plans, to a second home, to rental properties. When consumers are able to save, and then spend, the economy gets a boost. But as it stands right now, this option will only be available for six months.
7. Drives Home Values Up
Home values have been on the decline lately, (although some areas have been affected horribly, while others haven’t seen the declines.) However, when foreclosures begin to slow, and people once again begin expressing interest in buying residential real estate, home values begin to climb again. This in turn allows sellers to command a higher price for their homes, all the while the buyer is still getting a great deal on their mortgage loan.
Raising the conforming loan limits permanently does not have to result in the loosening of guidelines by lenders. Investors, consumers and banks learned a hard lesson by loosening underwriting standards over the last several years, and the consequences were dire. However, by raising the conforming loan limit permanently and maintaining strict guidelines for loan approval, our housing market can and should be back on track much sooner.
Ed Craine is CEO of San Francisco based Smith Craine Finance, an award winning mortgage brokerage. He was appointed Vice President of CAMB in 2007. Ed serves as an Executive Director for BNI, and is a contributing author to several NY Times Best Selling Books. Visit www.smithcraine.com
Ed Craine is the CEO of award winning Smith Craine Finance, one of the oldest independent Mortgage Companies in San Francisco, California. A 25+ year veteran of the real estate financing industry, Ed has originated and negotiated loans in excess of $2 billion, to include both commercial and residential properties. He has simultaneously held such notable positions as Vice President of the California Association of Mortgage Brokers (CAMB), as well as serving as the Public Relations Committee Chairperson of the 5,000 member strong association during 2007, the year in which the mortgage industry received more media attention than in recent history. Ed currently also serves as 1st Regional Vice President of the Certified Commercial Investment Member Institute (CCIM). He will be inducted as Vice President of the Southwest Region of CCIM in September 2008.