RTC Mortgage Blog

Why the Gov't Had to Extend the Loan Limits to $729,750

October 8th, 2010 7:43 AM by Richard T. Cirelli

Why the Gov't Had to Extend the Loan Limits to $729,750

By now you may have heard that last week that Congress approved a resolution that extends the $729,750 maximum loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration single-family loans until Sept. 30, 2011. This is very important for those of us in Southern California.

The higher loan limits for high-priced housing markets were instituted back in 2008, when President Bush signed the Housing and Economic Recovery Act. At the time, the mortgage market had crashed entirely, and the only games left in town were Fannie, Freddie, and FHA. They each had a loan limit of $417,000, which prevented a lot of potential borrowe rs from buying in higher priced markets such as California.

Who Are Fannie and Freddie?

Fannie Mae and Freddie Mac are two agencies that assure that mortgage money was readily available everywhere in the U.S. They set the guidelines for mortgage loans and make their programs available through most banks and mortgage companies in the U.S. They are not lenders themselves. When someone applies for a mortgage, the product and underwriting is the same regardless of which lender. The Lender makes the loan and immediately sells it to Fannie or Freddie who in turn bundles it with other loans from other lenders and creates a Mortgage-Backed Security (MBS). These MBS's are then sold to institutional investors throughout the world. The originating Lender may retain the servicing rights, meaning that the borrower will make their payments to them, but the loan itself is sold. Buyers of these MBS's can buy with confidence that all loans contained within their investment are underwritten to the same standards. The Government took over ownership of these two agencies a couple of years ago when they became insolvent.

FHA loans are insured against default by the U.S. Government. FHA loans have always been under the jurisdiction of the U.S. Department of Housing and Urban Development (HUD).

Fannie, Freddie and FHA are originating around 90 percent of all new loans today. So Congress had no choice but to extend the loan limits for almost another year.

The Government ultimately wants out of the ownership of Fannie and Freddie, which is costing billions each year. But the economic recovery is dependent upon the housing market and if you eliminate the source of 90% of our financing, the U.S. could never recover. To eliminate the dependence on Fannie and Freddie, increased interest in a private sector mortgage market is necessary. But in order for the Obama Administration to successfully phase out Fannie and Freddie from the U.S. mortgage market, they have to ensure there's a private sector market in existence behind them. Right now there isn't because MBS investors don't want to touch anything that doesn't carry a government guarantee.

What About Jumbo Loans above $729,750?

Despite the absence of a private sector mortgage market for jumbo loans, they are back big time. The few Lenders that offer them must be willing and able to keep these loans in their portfolio indefinitely

Take a look at the Jumbo rates below. They are the lowest they have ever been.

Mortgage Rate Update:

Mortgage rates improved further this week on a week indicator released by ADP concerning weekly jobless claims. But, tomorrow is the most important report of the month - the September Employment Report. Wednesday's rally in MBS pricing probably already factored in a weaker report on Friday so even if the negative expectation about employment is proven, we may not see more improvement in rates. And if the report is better than expected, look out! We'll surely give back all the gains we've made this week.

Posted in:General
Posted by Richard T. Cirelli on October 8th, 2010 7:43 AM



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