By Mike Colpitts
Mortgages on the nation’s most expensive homes are about to get more costly. In October the government is expected to halt backing jumbo mortgages of more than $625,500 through Freddie Mac and Fannie Mae, triggering higher interest rates and down payments. The change could also send home values lower in some high-end neighborhoods.
A study by the National Association of Home Builders found that the change will “reduce housing demand and place downward pressure on home prices in major housing markets.”
“The lower limits will place a constraint on home buying in high-cost housing markets, such as those along the coasts and in California,” said NAHB Chairman Bob Nielsen, a home builder in Reno, Nevada. “It is the last thing we need in a housing market that is still struggling to get back on its feet.”
Pressure on home prices could extend beyond homes directly affected by the lower limits because first-time and move-up home sales are interrelated, the study warns. Mortgages under the jumbo limits won’t be affected by Congress reducing the loan limits on mortgages the government guarantees.
Conforming mortgages are currently limited to $417,000 guaranteed by Freddie Mac and Fannie Mae, and are expected to remain the same, but a formula for establishing limits for high-cost areas will change from 125% to 115% of the area median home price, dropping the national ceiling to $625,500.
Homes above the ceiling would require loans that are presently about 60 basis points (0.6 percentage points) higher than conforming loans, according to the Federal Housing Finance Agency (FHFA). Interest rates and the cost of borrowing are expected to be even higher as a result.
An estimated 3.63 million owner-occupied homes are priced above the limits. Under the changes set to take place on Oct. 1, an additional 1.38 million homes will be above the limit, according to government estimates leaving a total of 5 million homes that will not be eligible for government sponsored funding.
Despite the lower limits many lenders remain optimistic about the changes on jumbo mortgages. “We’ll be able to do loans for buyers of more expensive homes,” said Steven A. Milner, CEO of mortgage banking company US Mortgage Corporation based in New York, which offers mortgage financing in 24 states. “The rates really aren’t terrible,” said Milner. “The LTV (loan-to-value) will be lower around 60% to 70%.”
Buyers of higher priced homes will have to come up with even more of a down payment, and all mortgages will be required to be fully documented. Homes valued above $5-million will typically be approved for mortgages of no more than 50% to 60% of appraised value.