Rhode Island homebuyers are already taking advantage of increased limits on mortgages insured by the Federal Housing Administration and those acquired by Fannie Mae and Freddie Mac. But at least one local mortgage specialist predicts that bigger conforming loans won’t significantly impact the higher-end housing market.
“It will have no effect on that $1 million purchase price. It doesn’t change the terms of the loan,” said Stephen Tetzner, vice president of Homestar Mortgage Inc. in Providence.
The Federal Housing Finance Agency raised conforming loan limits from the 2019 level of $484,350 to $510,400, starting Jan. 1, in response to rising home prices. It marked the fourth straight year that the FHFA increased limits after holding them level from 2006 to 2016.
Conforming loans are those that can be insured by the FHA and purchased, guaranteed or securitized by government-backed mortgage companies the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corp., known as Freddie Mac. Because of that, conforming loans generally feature lower interest rates.
‘A lifted limit is a way for borrowers to keep pace with a more expensive market.’
AL GRANT, The Washington Trust Co. senior vice president of mortgage origination
Despite the roughly 5% jump in the conforming loan limit this year, it’s likely the larger loans will most affect the “middle market” of homes in the $500,000 range, rather than leading to extravagant purchases that helped touch off the subprime mortgage crisis, Tetzner said.
“For somebody who is buying a house for a half a million dollars, it makes no difference that the conventional loan limit increases by $25,000,” he said. “It’s not going to affect or improve the market where it’s going to bring buyers into [it] in any way.”
Loan limits had little to do with the crisis of 2007-2010, Tetzner said. Rather, the fault was with irresponsible lenders.
“It was the way loans were underwritten. They were giving loans to people without verifying that they actually had the ability or enough income to be able to afford to repay them,” he said.
Although homebuyers have been able to get conforming loans at higher amounts, there are safeguards in place, said Rhonda DelSignore-Mulligan, senior mortgage adviser at Province Mortgage Associates Inc. in Providence. And, she pointed out, people in the market for homes in the half-million-dollar range generally have enough income and assets to support a large purchase.
“You still have to qualify the same way; you still have to show a lender that you have the ability to pay a mortgage,” she said. “This is just enabling [buyers] to stay within that conventional loan limit” without venturing into jumbo-loan territory.
What higher limits will do, Tetzner said, is allow buyers to afford more with a lower down payment. At the same time, they’ll avoid higher interest rates that often accompany jumbo loans, mortgages above the conforming limits. Conventional loans also allow more flexibility on a borrower’s credit scores.
Enabling buyers to borrow more is a valuable benefit as Rhode Island’s single-family home inventory continues to get pricier, said Al Grant, senior vice president of mortgage origination at The Washington Trust Co.
“A lifted limit is a way for borrowers to keep pace with a more expensive market,” he said, referencing data that tracks a 5.6% year-over-year price increase in December 2019 for single-family homes in the state.
And, Grant noted, loan limits have risen substantially as the government tries to keep pace with the market.
“Those limits have increased over $93,000 just since 2016, so that kind of gives you an idea of changes in the marketplace just in the last five years,” he said.
According to the Rhode Island Association of Realtors, the median price of a single-family home in 2019 was $285,000, up from $270,000 in 2018. Sales rose as well, totaling more than 11,000 last year for a 3% increase over 2018’s 10,670.
Grant estimated that within the first month of this year, Washington Trust saw more than $5 million in new loans that fell between old and new loan limits. Some have opted to use the loans as a tool to buy more-expensive homes by offering hefty down payments and financing the balance.
Most buyers are families either moving into Rhode Island or upgrading.
A fair number of doctors seem to be among those moving in, said DelSignore-Mulligan, who added that areas such as Barrington, East Greenwich and the northern part of the state have been seeing brisk single-home sales.
Rates are low and sellers are getting good money for their homes, making it a good time to act, especially for families who need more room, Grant said.
Fannie Mae and Freddie Mac “are just trying to be sensitive to the reality of rising home prices,” he said. “When you get into jumbo lending, that can become trickier.”
Raised limits on conforming loans may help to keep buyers clear of jumbo mortgages, which exceed FHFA limits. While jumbo loans can be a stepping stone to high-end home ownership, the requirements, such as a sky-high credit score, are more rigorous than that of conventional loans.
Higher conforming-loan limits have also offered a way out of a jumbo or adjustable mortgage for some Rhode Island homeowners, Tetzner said.
“Because of the increase in the loan limit, they can get a conventional loan, which makes sense for them to move into a more favorable term at a lower interest rate on their mortgages,” he said. “I definitely have seen a positive effect. It’s not dramatic, it’s not changing the market, but it’s definitely affecting a percentage of the market in a favorable way.”
Elizabeth Graham is a PBN staff writer. Contact her at Graham@PBN.com.
