Understanding the Higher Loan Limits

We have seen a whirlwind of legislative activity these past few weeks! There is much confusion surrounding the recently passed Economic Stimulus Package and higher loan limits. Unfortunately, the new law can be confusing to decipher, and not everyone will benefit. For this reason, we have provided an outline below that clarifies what this new law means for you and how you can benefit from the higher loan limits.

Description and Overview:

An economic stimulus package passed Congress on February 7, 2008 and was signed into law by the President on February 13, 2008. This new law is effective immediately and includes a temporary increase in both the FHA and conforming loan limits to as high as $729,750 in high cost areas. This means that the interest rates on many mortgages will go down because these loans are now eligible to be purchased by Fannie Mae and Freddie Mac or insured by the Federal Housing Administration (FHA). Previously, the FHA was only allowed to insure loans with balances lower than $200,160 - $362,790, depending on the county where the property was located. Also, Fannie Mae and Freddie Mac were only allowed to purchase loans with balances at or below $417,000. This resulted in limited options and higher financing costs for those with loan balances above these limits. The new law substantially increases these limits in high cost areas and opens up new options and lower financing costs for many people.

How to Determine "High Cost" Areas

There are two things you must know in order to determine if you are in a high cost area:

1. Understanding the Formula

If 125% of the local area median home price exceeds $417,000, the temporary loan limit would be that 125% of the median home price with a cap of $729,750. Here are three examples to illustrate this concept:

If the median home price in your area is $225,000, 125% of that number is $281,250. This is below the current $417k conforming loan limit. Therefore, the conforming loan limit in your area will not change. However, if $281,250 is greater than the FHA limit in your county, your FHA limit will go up to $281,250.

If the median home price in your area is $375,000, 125% of that number is$468,750. This is above the current $417k conforming loan limit. Therefore, the conforming loan limit in your area WILL change and go up to $468,750. This number is also higher than the highest FHA loan limits, so therefore your FHA loan limit will also go up to $468,750.
If the median home price in your area is $650,000, 125% of that number is $812,500. This number is greater than the maximum cap of $729,250. Therefore, the conforming loan limit in your area will increase to highest allowable amount under this new law which is $729,250.

2. Determining the Median Home Price in Your Area

As required by law, on March 6, 2008, the Secretary of Housing and Urban Development (HUD) published the median house prices and new loan limits for the various areas across the country. Contact me today and I'll research your info and let you know exactly what the median home price and loan limits are in your area and how you can benefit from this information.

What do all the dates mean?

There is some confusion because the bill has a provision that says the higher limits are only effective for loans originated between July 1, 2007 and December 31, 2008. In short, the reason it is effective beginning July 1, 2007, is because the credit crisis started to unfold in July and August of 2007. Mortgage market conditions rapidly deteriorated almost overnight. Many secondary market investors suddenly refused to purchase loans that couldn't be sold to Fannie Mae and Freddie Mac. (For more info on how this process works, please see the article entitled Saga of the US Mortgage Industry.)

Unfortunately, many mortgage banks had already funded these loans in their own portfolio or through their warehouse lines of credit. Their intention was obviously to sell these loans on the secondary market after the loans were funded. However, the credit crisis prevented them from doing so, and they were stuck holding these loans in their portfolio. The July 1, 2007 date in the bill is designed to allow these lenders to unload these mortgages and sell them on the secondary market to Fannie Mae and Freddie Mac.

However, the July 1, 2007 date has no bearing whatsoever on new refinance transactions! In other words, it doesn't matter when the loan you are refinancing was originated. The old loan could have been originated in 2005, 2006 or anytime before or after July 1, 2007 and it would have no effect whatsoever on your current purchase or refinance transaction. If you are financing a new loan today, whether it is a purchase or refinance transaction, that loan is subject to the new limits set forth in the bill.

The other date of December 31, 2008 means that the old limits will go back into effect after this year. In other words, now is the perfect time to buy a new home or refinance your mortgage because after this year, your costs will be higher and your options more limited again.

When does this all go into effect?

Immediately! However, Fannie Mae, Freddie Mac and various lenders have different policies as to how these loans are priced and underwritten. That is why it is imperative that you work with a Certified Mortgage Planning Specialist who is committed, qualified and equipped to give you timely information and expert guidance every step of the way.

Contact me today for a complimentary consultation. I can look up the new loan limits in your area and see whether you can save money in any way. Also, please pass along this update to anyone you know who may be able to benefit, and I'd also be happy to look up the new loan limits in their area and discuss with them whether they could save money.

Posted by Mark Brekhus on March 20th, 2008 10:39 AMPost a Comment (0)

Weekly Rate Lock Advisory - 3/31/2008

March 31st, 2008 9:23 PM

Weekly Rate Lock Advisory

This week is light in terms of the number of economic reports scheduled for release, however, two of the three reports that are scheduled to be posted are considered to be of high importance. With important data being posted only Tuesday and Friday, we should see several days of little movement in mortgage pricing.

The first relevant report of the week comes late Tuesday morning when the Institute for Supply Management (ISM) will release their manufacturing index. This index gives us an important measurement of manufacturer sentiment by surveying trade executives. A reading below 50 means more surveyed executives felt business worsened during the month than those who said it had improved. This month's report is expected to show little change from last month's reading of 48.3, meaning business sentiment remained close to last month's level.

February's Factory Orders will be posted early Wednesday morning. This data is similar to last week's Durable G oods Orders report, except that this report includes orders for both durable and non-durable goods. Unless it varies greatly from forecasts of a 0.7% rise, I suspect that it will be a non-event in the mortgage market.

The other important report of the week will be posted Friday morning. The Labor Department will release March's Employment report, giving us the U.S. unemployment rate and the number of jobs added to the economy. This is an extremely important report to the financial and mortgage markets. It is expected to show an increase in the unemployment rate from February's 4.8% to 5.0% and that approximately 40,000 payrolls were lost during the month.

Overall, I expect to see the most movement in rates either Tuesday or Friday. Friday is the most important day of the week with the employment numbers being released, but we will likely see a fair amount of movement in rates Tuesday morning also. In between we should see fairly calm days as long as th e stock markets don't stage significant rallies or a sell-off.

If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Posted by Mark Brekhus on March 31st, 2008 9:23 PMPost a Comment (0)

Weekly Rate Lock Advisory - 3/24/2008

March 24th, 2008 8:44 AM

Weekly Rate Lock Advisory

This week brings us the release of seven monthly and quarterly reports for the bond market to digest. Two of those reports can be considered much less important than the others, but with data scheduled for release each day of the week we will still likely see movement in rates from day to day.

The first report of the week is February's Existing Home Sales later this morning. It will give us a measurement of housing sector strength and mortgage credit demand, but is usually considered to be of low importance to the financial markets. Its sister report- New Home Sales, will be posted Wednesday morning. Since tomorrow's is the day's only data, it may influence bond trading enough to cause a slight change in mortgage rates if it varies greatly from forecasts. Current forecasts are calling both reports to show a decline in sales.

The next report and the first important data of the week is March's Consumer Confidence Index (CCI) late Tuesday morning. This index gives us an indication of consumers' willingness to spend. Bond traders watch this data closely because consumer spending makes up two-thirds of our economy. If this report shows that confidence is falling, it would indicate that consumers are more apt to delay making large purchases. If the report reveals that confidence looks to be growing, we may see bond traders sell, pushing mortgage rates higher Tuesday morning. It is expected to show no change from February's reading of 75.0.

Wednesday's important data comes from the Commerce Department, who will post February's Durable Goods Orders. This report gives us a measurement of manufacturing sector strength by tracking new orders for big-ticket items, or products that are expected to last three or more years. This data is known to be volatile from month to month but is still considered to be of high importance. Analysts are expecting it to show an increase in orders of approximately 1.0%. A larger increase would be considered a negative for bonds and could lead to higher mortgage rates Wednesday morning.

The next relevant data is Thursday's final revision to the 4th Quarter GDP. This is the second and final revision to January's preliminary reading and is expected to show no change from the 0.6% reading that was posted last month. Analysts are now more concerned with next month's preliminary reading of the 1st quarter than data from three to six months ago, so I don't expect this report to affect mortgage rates.

There are two relevant reports scheduled for release Friday. The first is February's Personal Income & Outlays report. This data helps us measure consumers' ability to spend and current spending habits, which is important to the mortgage market because of the influence that consumer spending related information has on the financial markets. If a consumer's income is rising, they are more likely to make additional purchase s. This raises inflation concerns and has a negative affect on the bond market and mortgage rates. Current forecasts are calling for a 0.3% rise in income and a 0.2% rise in spending.

The second report comes from the University of Michigan at 9:45 AM ET. Their revision to the March consumer sentiment index will give us an indication of consumer confidence, which hints at consumers' willingness to spend just as Tuesday's Consumer Confidence Index did. It is expected to show a small increase from the previous reading of 70.5.

Overall, it is difficult to label one particular day as the most important of the week. I am expecting the CCI or Durable Goods Orders reports to have the biggest influence on mortgage rates, so by default we can declare Tuesday or Wednesday to be of high importance. The truth is that rather than a significant change in rates one or two days, we will most likely see a slight change several days. Accordingly, the risk of floating an interest rate this week is not as great as last week, but with a low expectation of much improvement in rates the next several days, I am holding the lock recommendations for the time being.

If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Lock if my closing was taking place between 21 and 60 days... Lock if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Posted by Mark Brekhus on March 24th, 2008 8:44 AMPost a Comment (0)

Weekly Rate Lock Advisory - 03/17/2008

March 17th, 2008 9:30 AM

Weekly Rate Lock Advisory

Monday's bond market has opened in positive territory following weaker than expected economic news and EARLY stock losses. The stock markets are posting losses after news of the Bear Stearns bailout raised concerns about the stability of the U.S. banking system. Also contributing was news of the Fed's rare Sunday evening move where they lowered the Discount Rate by a quarter-point despite this week's FOMC meeting. The discount rate is the rate that the Fed charges banks for loans and is considered less important than the benchmark Federal Funds rate that will be addressed at tomorrow's FOMC meeting.

It has been an extremely volatile morning in the markets as stocks opened down sharply, then rallied to a point that the Dow was in positive territory before falling back into negative ground. They are currently well off earlier lows with the Dow now down 50 points and the Nasdaq down 35 points. The bond market is currently up 18/32, but we likely will not see much of an improvement in mortgage rates as a result of weakness late Friday.

This holiday-shortened week is moderately active in terms of economic releases scheduled to be posted, however, it does bring us another Federal Open Market committee (FOMC) meeting. There are four reports due to be released this week, with one of them considered to be of high importance.

The first piece of data came mid-morning today when February's Industrial Production report was posted at 9:15 AM ET. This report measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It revealed a 0.5% drop in output when analysts were calling for only a 0.1% decline. This is good news for the bond market and mortgage rates since it adds fuel to the theory that the economy is in a recession already.

The Labor Department will post February's Producer Price Index (PPI) early tomorrow morning. This index measures inflationary pressures at the producer level of the economy. There are two portions of the index- the overall reading and the core data. The core data is more important and watched more closely because it excludes more volatile food and energy prices. If the index shows a large increase, inflation concerns may rise, making long-term investments such as mortgage-related bonds less attractive to investors. This would lead to higher mortgage rates tomorrow morning. Current forecasts are calling for a 0.3% rise in the overall reading and a 0.2% increase in the core data.

Also tomorrow is February's Housing Starts, but it will likely not have much of an impact on mortgage rates. It gives us a measurement of housing sector strength and future mortgage credit demand, but is usually considered to be of low importance to the financial markets. It is expected to show a decline in new starts from January to February.

The FOMC meeting begins early tomorrow and is expected bring another sizable cut short-term interest rates. Many analysts think .75 of a percent reduction is coming from this meeting. The majority are predicting a .50 cut, but the .75 is a possibility. I believe the .75 will rally the bond market and lead to lower mortgage rates, while only a .25 drop could be considered as bad news for bonds and lead to higher mortgage rates.

What will also likely cause volatility in the markets is the post-meeting statement. Traders are hoping to pick up an indication of future Fed moves, particularly if the Fed expects to cut rates again anytime soon. It is often the post-meeting comments that cause the most volatility because the Fed move is often predicted. However, there are plenty of different opinions on what the Fed will do at this meeting, therefore, the move itself and the following statement could both cause significant movement in the markets.

The Conference Board will post its Leading Economic Indicators (LEI) for February late Thursday morning. This index attempts to measure economic activity over the next three to six months. Current forecasts are calling for a 0.3% decline, indicating that economic activity will likely slow in the coming weeks. This would be good news for the bond market and mortgage rates.

Overall, look for tomorrow to be the most important day of the week due to the FOMC meeting and PPI release. The rest of the week will likely be driven by outside factors such as stock movements. If the stock markets stage a significant rally or sell-off, we should see bonds move in the opposite direction. The bond market will close early Thursday and remain closed Friday in observance of the Good Friday Holiday. There is a possibility of seeing additional volatility in the markets as investors prepare for the long weekend.

If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Lock if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Posted by Mark Brekhus on March 17th, 2008 9:30 AMPost a Comment (0)

Weekly Rate Lock Advisory - 03/09/2008

March 10th, 2008 1:19 AM

Weekly Rate Lock Advisory

This week brings us the release of four economic releases for the bond and mortgage markets to digest along with a 10-year Treasury Note auction. None of the important economic news is scheduled for release until Thursday. Two of the four reports are considered to be of high importance to the markets. This means that we will likely see the most movement in rates the latter part of the week.

The first piece of news comes Tuesday morning with the release of January's Goods and Services Trade Balance. This report gives us the size of the U.S. trade deficit. It is the week's least important piece of news and likely will not influence mortgage rates much.

Thursday morning brings us the release of February's Retail Sales data. This report is extremely important to the financial markets because it measures consumer spending. Since consumer spending makes up two-thirds of the U.S. economy, data that is related usually has a big impact on the financial m arkets. This month's report is expected to show an increase in sales of approximately 0.1%. If we see a decline in sales, the bond market should rise and mortgage rates will likely fall. If it reveals a larger increase, I expect to see bond prices fall and mortgage rates rise Thursday morning.

The Labor Department will post February's Consumer Price Index (CPI) early Friday morning. This index measures inflationary pressures at the consumer level of the economy. There are two portions of the index- the overall reading and the core data. The core data is more important and watched more closely because it excludes more volatile food and energy prices. If the index shows a large increase, inflation concerns may rise, making long-term investments such as mortgage-related bonds less attractive to investors. This would lead to higher mortgage rates Friday morning. Current forecasts are calling for a 0.3% rise in the overall reading and a 0.2% increase in the core data.

Also on tap Friday is the University of Michigan's Index of Consumer Sentiment for March at 9:45 AM. This index gives us a measurement of consumer willingness to spend. If confidence is rising, then consumers are more apt to make large purchases. This helps fuel consumer spending and economic growth. A drop in confidence will probably hurt the stock markets and boost bond prices, leading to lower mortgage rates. If the index rises, indicating that confidence is rising and spending will likely rise, we may see mortgage rates move higher late Friday morning if the CPI doesn't show as any surprises. It is expected to show a reading of 70.5, down slightly from February's 70.8.

Overall, it will likely be another active week in the mortgage market. Thursday or Friday both can be labeled as the most important day of the week. Either can lead to a significant change to mortgage pricing. The Treasury auction is scheduled for Thursday, but its results will not b e posted until 1:00 PM ET. If investor demand was high, we may see bonds rally during afternoon trading, however, weak demand could lead to selling and an increase to mortgage rates. Generally speaking, this week is definitely a good one to maintain contact with your mortgage professional if an interest rate has not been locked yet, particularly the latter part of the week.

If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Lock if my closing was taking place between 21 and 60 days... Lock if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Posted by Mark Brekhus on March 10th, 2008 1:19 AMPost a Comment (0)