Executive Summary
The Office of Federal Housing Enterprise Oversight (OFHEO) has just released the new maximum conforming loan limits, established pursuant to the Economic Stimulus Act of 2008, which will allow homebuyers in several metropolitan areas to obtain conforming loans as large as $729,750, instead of the former limit of only $417,000.
The counties and metropolitan areas that will actually receive limits higher than the former $417,000 threshold can be viewed on OFHEO's website here. Alternatively, individuals can also seek out more detail on their particular county through HUD's website here.
The benefit of the higher threshold, for those purchasing homes in affected counties, is the opportunity to borrow money at conforming loan rates instead of so-called "jumbo" rates. In recent months the spread between conforming and jumbo loans has increased significantly, so individuals who may have been purchasing or refinancing a $500,000 loan could see a cost savings of an entire 1% on the interest rate for their loan.
However, some critics have emphasized that the end result may be less than anticipated, because the increase in loan limits could actually slightly increase borrowing costs for all conforming loans. The primary reason is that given a limited amount of available capital for mortgages at all in today's environment, there is a risk that when these larger loans are written, they may crowd out some other smaller loans. After all, the capital required to raise one "large" conforming loan of $729,750 in an expensive county may absorb the capital that would have otherwise been available to finance three $225,000 loans in a less expensive county, and the fight for available capital can drive up interest rates for all. In addition, there is some discussion of the increased perceived risk in the Fannie and Freddie mortgage pool by acquiring larger loans on larger properties (that can experience higher absolute declines, particularly since the more expensive counties may theoretically have run up higher and therefore have more downside risk).
Will this be a real boon for consumers? Probably not. But will it help at the margin, in the aggregate, across the country - yes, some reduction in borrowing costs for the stressed consumer will probably help the consumer, at least in the short run. At the end of the day, though, individual homebuyers (or those considering refinancing) will still need to look at precisely what terms they can get on an individual basis for their particular situation, whether it is purchasing a new property, refinancing an existing loan simply to reduce fixed interest costs, or trying to refinance out of an even less desirable loan that has become toxic (e.g., an option-ARM that became unafforable after the interest rate reset).
The new loan limits are set to expire at the end of the year. After December 31, 2008, we'll be back to the $417,000 conforming loan limit (although the limit is also adjusted annually for inflation) - unless, of course, Congress acts to further alter the rules!
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