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Fannie Mae Crushes The Impact Of New Jumbo-Conforming Home Loans

March 2008

Last week, the Department of Housing and Urban Development announced the increased lending limits allowed by the Economic Stimulus Act of 2008. With much fanfare, politicians claimed great accomplishment. Listening to the politicians and many wishful-thinkers, the new lending limits will (i) provide a refinancing opportunity to numerous borrowers whose subprime loans are resetting with much higher payments, and (ii) add liquidity to real estate markets to keep real estate prices from continuing to decline. With much less fanfare, Fannie Mae quickly told the real story - not much is really going to change.

According to federal regulators, roughly half of all jumbo mortgages (those over the FHA limits) are in California. The Economic Stimulus Act of 2008, signed into law in mid-February, establishes temporary increases to the loan amounts that HUD's Federal Housing Administration (FHA) can insure. Previously, FHA's loan limits were capped at $362,790, which did not do much to help borrowers in high cost real estate markets like California.

Last September, we supported increasing loan limits for conventional loans. However, we never saw increased lending limits on conventional loans as providing a major cure. This occurs because the increased lending limits increase liquidity for such loans in the secondary market, but do not solve the serious problems that caused the bubble to form in the first place. The aggressive lending that created this mess was based on the premise that increasing real estate prices would bail everyone out. No one is accepting that assumption currently. Consequently, real estate prices need to decline to the point where affordability is back to historic/sustainable levels. Fannie Mae knows that if it purchases loans based on anything other than sound underwriting, the credit markets will not repurchase the mortgages in the secondary market.

Fannie Mae is accepting only the best loans

Fannie Mae, who would be responsible for purchasing the majority of these new higher-limit loans, provided its requirements in a March 6, 2008 announcement. The new, larger loans face important restrictions that will cause most would-be borrowers to not qualify. Here is a summary of Fannie Mae’s requirements for the new jumbo-conforming loans:

1. A first loan can be refinanced, but one cannot refinance a first and second into the new first loan. If there is a second loan, it must be re-subordinated. Since the second mortgage holders are understandably nervous, borrowers will likely have to immediately repay some substantial percentage of the second mortgage to get the second to agree to the subordination.
2. Loans are limited to:



a. 90% loan to value (LTV) for principal residences purchased with a fixed rate loan,
b. 75% LTV, and 95% first and second mortgage combined LTV (CLTV) for a principal residence refinanced with a fixed rate loan,
c. Adjustable-rate mortgages (ARMs) are limited to 80%/80% (LTV/CLTV) on a purchase and 75%/90% (LTV/CLTV) on a refinance for principal residences,
d. For second homes and investment properties, the maximum LTV/CLTV is 60% in all cases for purchases,
3. A 700 FICO score is needed for any 80% LTV purchase loan. A 660 FICO score is needed for all other loans.
4. The following are not eligible:
a. Cash-out on refinances b. Manufactured homes c. Reverse mortgages d. Balloon payments e. Two-, three-, and four-unit properties.
5. Borrowers must not have had any late mortgage payments in the preceding 12 months.
6. Income must be fully documented.
7. Maximum Debt to Income ratio (DTI) of 45%. This calculation includes the new mortgage payment, payment on other debt, property taxes, and HOA dues.
8. A full appraisal with interior inspection is required.

California gets higher limits

If the above requirements are not a deal-killer, then the following California limits are good until the end of the 2008. At that point, FHA conventional loans revert back to $362,790. Counties are listed in order of their median Home price.

The new limits are based on 125% of each county’s median home price as of the date of the HUD announcement. The maximum loan limit is $729,750, and the minimum loan limit is $271,050.

Fourteen counties (the first fourteen counties listed) would have had higher loan limits were it not for the $729,750 limitation included in the new law. Three counties (the last three counties listed) have sufficiently low real estate prices that they qualified for the lowest limit ($271,050), and were not affected by the 125% calculation.

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