New conforming loan limits and other sources of borrower confusion

Just what the conforming loan limit is on single-family homes and condos in Southern California -- it was raised last year to $729,750 in designated high-cost areas under the Economic Stimulus Act of 2008 -- has been a continued source of confusion because it varies throughout our region. And for 2009 it changed again.

Under the previous federal rules it was simple. Fannie Mae and Freddie Mac couldn't buy loans larger than $417,000, the limit for conforming mortgages. Any loan greater than that was considered a riskier jumbo, or nonconforming, loan, and borrowers paid a higher interest rate on it.

For 2009, the revised maximum conforming limit is $625,500. And that's what it is for the Los Angeles-Long Beach-Santa Ana metropolitan area. But for the Santa Barbara-Santa Maria-Goleta area it's $603,750; for Oxnard-Thousand Oaks-Ventura, $598,000; and for San Diego-Carlsbad-San Marcos, $546,250.

Does this matter to consumers? Don't most lenders charge a higher interest rate on loans above the $417,000 limit that applies everywhere else anyway? Or does it just mean that at least money (even at higher rates) is available to borrowers seeking larger amounts? 

For answers to these curiosities L.A. Land checked in with expert Keith Gumbinger, vice president of mortgage research firm HSH Associates:

That the "expanded conforming" program remains in place (even with a maximum limit of $625,500) is a good thing for at least some borrowers.

While the market is still adapting to the new program, it does seem at the moment that essentially, there are several "tiers" of costs for borrowers -- those to the $417,000 "true conforming," those for the tier between $417,000 and whatever the limit is in your area (expanded conforming), and that for "true jumbo" mortgages, those over the limit in effect.

Presently, borrowers below the $417k limit are finding rates in the low 5% range (30-year fixed); those in the "tweener" tier are finding rates somewhat higher than that (about 0.30 to 0.40 higher lately), and those in need of a "true jumbo" are seeing rates near 7%....

Why should borrowers care?  Less accessible (or affordable, if you prefer) financing serves to temper demand for housing, which in turn continues to pressure home prices downward. High rates mean little opportunity to refinance, and falling home prices make it more difficult to do so as equity disappears. This may trap some homeowners in mortgages they can no longer afford, and could even exacerbate the "underwater" situation, too.

There you have it. Thanks to Keith for the explainer and to the reader who asked about this.

-- Lauren Beale

Thoughts? Comments?

Credit: Brucie Rosch / For The Times

Comments

[Amazing_Happens]

My loan falls in the "tweener" tier, but I've heard it referred to as a "jumbo agency" loan. Not sure if this is common terminology, at any rate, it makes comparing rates a hassle to say the least. They don't post the "tweener" rates online (at least, I don't find them with any consistency), and if I just want to ask about current rates, I end up with some persistent lender or broker wanting to do business with me!

[Laker]

"....High rates mean little opportunity to refinance, and falling home prices make it more difficult to do so as equity disappears. This may trap some homeowners in mortgages they can no longer afford, and could even exacerbate the "underwater" situation, too....."

So why the hell the government is trying to push rate to 4.5% or 3% so people would get trapped into that and once lending returns to normal rates as in 6-8%, these buyers will be trapped with no ability to sell or refinance???????
HELL O!!!!!

[Pasadena'ed]

Laker: "So why the hell the government is trying to push rate to 4.5% or 3% so people would get trapped into that and once lending returns to normal rates as in 6-8%, these buyers will be trapped with no ability to sell or refinance???????
HELL O!!!!!"

You assume that most consumers think "big picture". They don't, and had they did, we wouldn't be in the collective mess we're in now. The government just wants to stop the bleeding with whatever they've got available. Unintended consequences be damned.

[Ann A Leptic]

Thanks for claifiying. We need to get the word out on this. (No I am not a realtor) I was just able to refinance. Went from 5.65% to 4.73%. Didn't pull money out, just saved a bunch on my monthly fixed payment.

[Hoping To Refinancing]

I looked into refinancing my $500k mortgage @ 5.625% for a lower rate yesterday but the rate for the loan quoted was higher than 5%. However, if the mortgage was paid down to $417k, the rate quoted was lower than 5%.

I was told that I could get a home equity line of credit first and pay down the mortgage to 417k and then refinance the mortgage to get the lowest rate.

Is what I was told true? If one has a mortgage above the conforming limit but within the "expanded conforming" limit, can that person get a home equity line of credit to pay down their existing mortgage to the conforming limit of 417k and then refinance the 1st mortgage without having to close/refinance the home equity line of credit?

I don't want to get a home equity line of credit if I can't refinance my 1st mortgage at the lowest rate.

[Laker]

Hoping To Refinancing ,
It depends if your house has more than 30% equity. Less than that - NO HELOC.
Then, it is up to the HELOC bank. They can elect to subordinate the 2nd to a new 1st or ask you to pay it off and thus close the HELOC.
I think it all boils down to your equity. I say if you have more than 40% equity, you can do it, if you have 30-40% equity very questionable. If you have 20% equity or less, No HELOC for you at all.

[Drew]

Laker is correct, in theory it could work but you'd need sufficient current equity.

There are still a few lenders out here who might do this, but because many have bailed from this type of program it may be hard to find one.

[Kelli]

What about the way the conforming loan limit is being applied to new refis under the Obama plan? I have a Fannie Mae backed mortgage, am current on loan payments, and otherwise meet all criteria for a refinance under the Home Affordable Refinance Program, or HARP. I also live in a high-cost area where the conforming loan limit has supposedly been raised to $729,500 (well over my mortgage amount).

My lender tells me that loans may be refinanced to 105% loan-to-value ratio with no mortgage insurance under this plan, but this is limited to standard conforming loan amounts, which are those at or below $417,000 in Ventura/Santa Barbara. He tells me that all of the banks have interpreted the regs this way.

This is not consistent with other sources on the internet on this topic. Any insights?