Should you be concerned that the maximum loan amount you’ll be able to obtain through the biggest players in the mortgage industry – Fannie Mae and Freddie Mac – might be cut sometime next spring? You just might.
That’s because mortgage applicants who no longer qualify under the revised limits will be forced to shop in the so-called jumbo arena, where minimum credit scores and financial reserve requirements tend to be tougher and down payments heftier than in the conventional space dominated by Fannie and Freddie.
You might also have to settle for an adjustable-rate mortgage rather than a fixed-rate. Or you might end up in a situation where you need a higher-rate “piggyback” second mortgage in order to afford the down payment on the first mortgage deal you’re offered.
Here’s a quick overview of what could push eligible loan amounts downward and what that may mean for thousands of buyers across the country who abruptly find themselves in jumbo land.
At a meeting in Washington last week, Edward J. DeMarco, acting director of the agency that oversees Fannie and Freddie in conservatorship, said he is seriously considering reducing loan maximums as part of a strategy to lessen federal involvement in the mortgage market. Though he offered no specifics on dollar amounts, industry analysts say the maximum Fannie-Freddie loan size could drop from the current $417,000 to $400,000 in most parts of the country, and from $625,500 to $600,000 in designated high-cost areas such as coastal California, metropolitan Washington, D.C., New York City and its suburbs, parts of New Jersey, Massachusetts, New Hampshire, Colorado, Idaho, Wyoming and North Carolina. The decreased limits could be announced next month and take effect as early as May.
Those decreases may not sound like much, but they’ll have an impact on large numbers of consumers who want to purchase homes with prices above the average for their areas, especially newly built houses. Real estate and lending groups are concerned that making mortgage money tougher to obtain – pushing buyers into a segment of the market where Fannie and Freddie cannot operate – is counterproductive in a housing economy still struggling to recover from bust and recession.
There’s another, perhaps more important problem here as well: Reducing loan amounts next spring would complicate what is already shaping up as a challenging lending environment for consumers in 2014, critics say. Starting in January, new federal regulations that restrict debt-to-income ratios and allowable total fees in “qualified” mortgages will take effect and make significant numbers of applications ineligible for Fannie-Freddie loan terms. Some industry estimates suggest that as many as one in five borrowers this year could not pass the qualified mortgage tests scheduled for next year.