New Jumbo Loan Limits May Ignite a Niche Market

Higher limits on Fannie Mae and Freddie Mac loans may spark sales of high-end homes by making it easier and cheaper to finance them. The news is good for both buyers and sellers, and may inspire a surge in sales in a market that's been stagnant for months.

Rumors have been circulating for the past several months that the government might decide to allow its two biggest backers of residential loans, Fannie Mae and Freddie Mac, to start participating in the high-end loan arena, or so-called jumbo mortgage market. In an effort to stimulate a dying housing and mortgage market, officials at the Office of Federal Housing Enterprise Oversight recently did just that, raising the size of loans that can be guaranteed by Freddie Mac and Fannie Mae to jumbo proportions.

New rules for jumbo mortgages

Jumbo loans are super-sized mortgages for homes in the upper end of the price range. In the past, they've been too large to be backed by Fannie Mae and Freddie Mac; therefore, they've traded in a market supported by private investors. Unfortunately, those investors have been few and far between since the mortgage markets began a meltdown, and this has caused a severe drought within the jumbo market. Buyers who've been trying to buy a high dollar home, for example, have recently found that rates are prohibitively high compared to conventional loans. Now, the twin agencies that insure conventional loans are in the jumbo mortgage game, and this should help to even the playing field, increase the supply of loans, and bring jumbo interest rates down to parity with other mortgage rates.

Time to take action

The ceiling for conventional loans backed by Fannie and Freddie was $417,000, prior to this new change. That meant that any loan above that amount was a non-conforming jumbo. But the new loan limits mean that the agencies can trade in loans worth as much as $793,750. Limits vary somewhat from region to region because they're based on the median prices of homes in particular areas; but these new limits apply to loans in about 70 metropolitan areas. The places where it will have the biggest impact are in expensive markets, including parts of California, where even a relatively modest home can easily cost more than $417,000. The National Association of Realtors reports, for instance, that a median-priced home in San Jose costs $850,000, and average homes throughout the state are in the jumbo loan price range. In South Florida's massive condominium market, about three out of every four properties qualifies for a jumbo loan. And New York City's median home price is $525,000, so the phenomenon impacts markets from coast to coast.

The new loan limits are already boosting the spirits of buyers and sellers, but are set to expire on January 1, 2009, unless officials revise them. If you need to buy or refinance with a jumbo, you may want to act now.