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New Conforming Loan Limit Increase Has Too Many Strings

March 18, 2008

After reviewing Fannie Mae’s and Freddie Mac’s Jumbo Conforming loan guides, it appears that they have come up with an extremely cautious plan to administer the new Jumbo Conforming limit increase. Let’s be clear, this is not what Americans thought it was going to be. (Fannie Mae Guides & Freddie Mac Guides)

The GSE’s have created a new hybrid program for consumers. It is not a Conforming loan. This new program is purely and simply all but a symbolic gesture of help. It is tailored to dissuade refinances through ultra-tight underwriting guidelines while being some-what attractive to new home buyers, assuming you have perfect credit and a 10-25 percent down payment.

Unfortunately, many of the loan origination calls coming into lenders for this new loan product are for refinances. These consumers just cannot qualify. Of course you would assume they do not qualify because of income or debt ratios, but loan originators do not even need to get that far into the loan application process to decline these borrowers. In most cases their first mortgage exceeds 75% of the value of the home. The deal is immediately dead.

As far as rates are concerned, the rates follow closely to the normal conforming products. So a relative thumbs up with respect to rates. The new Jumbo Conforming product is about .125%-.375% higher in rate compared to the old standard conforming loan across different lenders. Below is a quick rate comparison based on today’s rates.

Conforming 30YR Fixed
5.75% / 0 points

Jumbo Conforming 30YR Fixed
6% / 0 points

So if you were applauding this portion of the stimulus package, I would not applaud quite yet. This new hybrid, conforming product may not have the impact on the economy lawmakers may have suggested. Not surprising as we have seen this occur on some of the initial consumer foreclosure bailout policies rolled out early in the credit crunch.

One quick side note: I do want to applaud Freddie Mac for at least offering a refinance cash-out option as Fannie Mae did not. Although the guidelines are tight, they did put it in the guides.

Please feel free to put your loan scenarios in the comments so we can illustrate some of the challenges loan originators face with the new Jumbo Conforming product.

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Posted by rslater | Filed Under Featured, Mortgage Articles, Real Estate Articles | 2 Comments