Conforming Loan Limit Increase

In conjunction with the stimulus package on its way to the President's Desk, a new conforming loan limit is on its way in our area. The final legislation effectively limits the increase to certain high cost areas including California, Boston, NY, and metro DC. In our area, the limit will be $562,500, up from $417,000, for the remainder of 2008 only.

The impact of this generally will mean lower rates, and perhaps easier refinancing, for loans between the old limit and the new one. However, the actual rate differential between this new "tier" and "original" conforming loans (still below $417K) remains to be seen; the rates likely won't be equal because of some market constraints. Namely, the temporary nature and limited geography means lower volume and lower trading liquidity, which equals lower demand for these types of securities. So will it help? Yes. Dramatically? We'll see.

Read more: Why Didn't the Fed Cut Impact Mortgage Rates More?

Fed Rate Cut - Why Didn't Mortgage Rates Fall Much?

The Fed's emergency three-quarters of a point rate cut didn't have much impact on mortgage rates...or did it? Well, it did and it didn't (don't you love answers like that)? The bottom line is that the Fed Funds rate certainly impacts mortgage rates, but sometimes indirectly, and surprisingly, sometimes they can move in opposite directions! This is a very high level and over-simplified discussion of the whys and hows -- it's tough to fit this in to one post though, and I'm not a mortgage banker, so bear with me, and feel free to contact me directly if you want to discuss more. Here we go:

The Fed Funds Rate is the overnight borrowing rate between banks. Banks are required to have certain reserve funds at the Fed each night to cover their deposits (remember reading about the Depression and runs on banks?) Sometimes banks don't have the funds so they borrow from other banks who have excess funds. The rate is an important policy tool of the Fed--it helps keep the balance of economic growth vs inflation in check. That's the key trade-off that the rate helps control--if rates are too low, we'll get inflation. If rates are too high, it prohibits growth.

The FFR is a very short term rate (overnight), whereas mortgage rates are more aligned with longer term instruments like bonds. After all, a buyer is theoretically borrowing money for 30 years (the length of a mortgage, though the lenders all know that most borrowers sell or refinance long before that time.) Bond yields, which impact 30 year mortgages, are tied to long term investor market expectations.

So which loans does the FFR impact?

30 year fixed -- Not directly impacted, though they often move in tandem because of shared expectations about long term growth of the economy. But if the FFR drops too low and investors get too worried that it will result in inflation, then mortgage rates can actually move in the opposite direction.

ARM loans -- These are generally tied to short term (1 year) treasuries, and so likely are impacted by rate cuts, but only if it varies from what was "expected" (see more below).

HELOCS -- These are generally tied to the prime rate, which moves in step with the Federal Reserve.

Subprimes -- Depends what index it's tied to, but they are often tied to LIBOR. LIBOR rates have been falling this month.

How markets move after FFR changes depends on expectations; the Fed meets on a regular schedule and many pundits predict their every move, so there are expectations "built in" to interest rates. If the Fed acts "as expected", then there are minimal changes following an announcement. Yesterday's announcement was a surprise mostly in the timing--many pundits had already predicted a half point cut later in January. So the impact was not overly dramatic.

NB: Not covered in this post is the differences in impacts between "Jumbo" and "Conforming" loans -- the magic number there is $417,000 because that's the mandated upper limit of loans that Fannie and Freddie can purchase from banks and re-sell--with a guarantee--to investors, creating a very liquid secondary market. Liquidity and guarantees lowers risk for banks, which helps keep rates lower for buyers in that bracket.

Update: In conjunction with the just released stimulus package comes news that Congress is evaluating whether or not to raise that $417K limit to $625K. If implemented, this will do a ton to create more affordable mortgage options in the DC area...more to come.


Read more: How do Fed rate cuts affect adjustable mortgages?

Read more: A slightly dated article that still does a nice job explaining impacts on different mortgage types.

FAQ: ARM Loans

A very informative article about shopping for ARM loans (more popular given the recent jump in both jumbo and second trust rates).

The bottom line is to show around for rates, and know which questions to ask.


- Determine the initial interest rate and how long you will get it
- Ask if it’s a negative amortization loan
- Determine what the rate increase will be and how often it ‘resets’
- Determine what the annual and lifetime ‘caps’ are and how quickly you might reach them – this gives you the worst case scenario on your rates. Make sure you understand what the payment is at those rates.
- Know what the index (LIBOR, T-bill, etc) and spread is
- Know whether your loan is a balloon, and what term the balloon is, or based on a 30 year amortization

The author wisely points out to be wary of internet lenders. I’ve seen cases of this myself—even if the rate does turn out to be as low as they claim, keep a careful eye on the fees they charge but are buried somewhere in the Good Faith Estimate (GFE), and often not in the “Lender Fee” section where you’d expect.

Speaking of fees, that’s the only I’d add to this list—always ask what the fees are, and what they’re for. Always ask about things like: administrative fee, underwriting fee, processing fee, application fee, document fee, and warehousing fee. Don’t get me wrong—a lender needs to make money too, but these are the fees you should be comparing, and negotiating. And also understand the origination fee and any discount fees, especially as it relates to the interest rate you’re being charged. Two lenders might both be quoting 7%, but one of them is charging you a “point” (equal to one percent of the loan value and listed as a “discount point” on the GFE) to get it!

As always, you can contact me with any questions, or to look over your GFE with you. I can’t negotiate it for you, but I can tell you which things I’ve seen before and which things I haven’t. I routinely do this with my clients.

And of course, the way to avoid many issues is to work with a reputable lender in the first place!

Sub Prime Meltdown: The Middle of the End?

Several weeks ago I posted about Fannie Mae and Freddie Mac programs to help borrowers who are in risk of defaulting, or have already defaulted, on their sub-prime loans. By now, everyone has read of the "melt down" fueled by 2/28 and 3/27 adjustable rate loans that offered very low teaser rates back i n 2004-2005, and are due to begin resetting this year. The issue is that lenders approved borrowers based on those low initial payments and now that the payment will be going up--often very dramatically--borrowers who either didn't understand the resets, or just aren't good at budgeting, are in serious trouble.

Now Congress may be stepping in as well, in the form of a "stealth bailout" via the FHA. The Federal Housing Authority has many loan programs aimed at helping first time buyers, but the loans came with some serious drawbacks: heightened inspection requirements, mortgage insurance, and most importantly in this area, a relatively low maximum borrowing cap. With prices so high in this area, FHA loans just weren't a good deal for most borrowers. Congress is currently considering an FHA overhaul package that would, among other things, raise the cap, and lower the down payment requirement, all while providing 30 year fixed rates that are about 3% below the going sub-prime rate. Obviously FHA is expecting to see a surge in applications. Of course there will be snags as this bill makes it through the convoluted process, but if it comes through relatively intact, this could be the "middle" of the end of the "meltdown."