By Svenja Maarit Gudell
SENIOR ECONOMIST, ZILLOW
chAnging conForming-loAn limits mAy hAve limited impAct
Conforming-loan limits have been enthusiastically debated in the past few months.
Since the housing crisis began, legislation aimed at keeping mortgage credit available
has increased the maximum loan amount for government-backed loans to as much as
$729,750 in high-cost markets. after lowering fannie Mae and freddie Mac conforming-loan limits in 250 counties, as well as federal Housing administration (fHa) loan limits in
669 counties, Congress moved to restore the fHa loan limits two weeks after they changed
this past Oct. 1.
Why are these limits so important? Loans that fall within these limits have cheaper interest
rates. but how much impact are the new fannie and freddie limits having and how much
impact would the lower f Ha limits have had on consumers?
Critics have argued that the housing market will be affected significantly and negatively by
the lower limits of fannie and freddie because many consumers may be forced into a lower-priced home to stay within conforming-loan limits. Zillow found that only 0.75 percent of
homes in the continental U.S., or 2.5 percent of homes in continental high-cost counties,
are potentially affected by this change, however.
Zillow covers 168 of the 250 counties in the continental U.S. that are subject to lower limits.
We found that, although limits fell by 10.2 percent on average in these counties, home
values fell by 23. 9 percent from January 2008, when these higher limits were established
initially, to October 2011. On average, buyers are getting more home for their money despite
lower limits. Of the 168 counties that Zillow covers, 20 counties had limits drop by a larger
percentage than home values, however. The majority of these counties are located in
Massachusetts, New york and Virginia.
Let’s consider the actual rates that homebuyers are getting for properties that are more
than the new limits but less than the old ones. We looked at the rates these newly minted
jumbo-loan applicants were quoted for primary-residence purchases with a 30-year fixed
mortgage and a downpayment ranging from 15 percent to 25 percent. We then compared
those quotes to the average rates received by applicants with loans that met the expanded
conforming limits (see graph below). There was only a difference of 52 basis points.
That equates to around $215 dollars a month on a $700,000 purchase.
for fHa loans, Zillow
covers 389 of the 669
counties that had limits decrease on Oct. 1,
but have since been
increased again. On
average, their limits
fell 14. 4 percent, although home values
fell by 23. 5 percent
from January 2008
to October 2011. Of
those 389 counties,
88 had their limits decline more than their
home values declined.
The majority of these
counties are located in
Massachusetts, New york, New Jersey, Virginia, Pennsylvania, North Carolina and
2011 AVERAGE RATES QUO TED FOR 30-YEAR
FIxED MOR TGAGES
Source: Zillow Mortgage Marketplace
Oct 2 Oct 30 Nov 27
Below previous limits but above
new limits = Jumbo Loan that
previously was an Expanded
although more buyers would be affected by lower fHa limits, the impact still would be
relatively small, because the limits dropped by a lower percentage than home values in
most counties. for fannie and freddie conforming-loan limits, however, it’s evident that
the overall impact is limited because relatively few homes nationwide will be affected,
and the few affected borrowers still will have access to mortgage credit, just at somewhat
because these lower limits are not an issue for the overall health of the real estate market
and were always intended to be temporary (but have been repeatedly extended), it
becomes difficult to see the public-policy benefits of subsidizing rates for mortgages as
expensive as $729,750.
svenja maarit gudell joined Zillow’s industry-leading economics and analytics group in 2011. She produces
real estate data and performs econometric analysis, including foreclosure and negative equity research, on
more than 150 markets. Gudell received her Ph.D. in finance from the University of rochester. She previously
worked for analysis Group in boston and the federal reserve bank of New york as an assistant economist in
the International research Group. Contact Zillow at (206) 757-2701.
Peter Bell PETER BELL, PRESIDENT AND CEO NATIONAL REVERSE MORTGAGE LENDERS ASSOCIATION
BY JENNIFER E. GARRETT
How would you describe the current state
of the reverse-mortgage market?
It’s a challenge to work with a product that is a grow-ing-balance mortgage against a declining-value
asset. Volume has contracted recently as a result of
diminished home values and investors leaving the
proprietary market. The combination of demographic
trends as well as the wealth profile of households
points to a very bright future for the reverse-mortgage industry, however. There are challenges to that
from some consumer distrust of the product. Some
of it stems from negative reporting in the media, and
some of it comes from a lack of understanding of
how reverse-mortgage products work.
What are you keeping an eye on this year?
The Consumer financial Protection bureau is required
to produce a study of the reverse-mortgage market and
turn that over to Congress in July. fHa is continually assessing the performance of the HECM program and will
probably put out a proposed rule to add in a layer of
financial assessment and under writing for prospective
Why is this rule change being proposed?
We’ve been doing HECMs for 20 years now, and there
are some people who get a HECM and then ultimately
find that they don’t have the means to meet their obligations. Once upon a time, a reverse mortgage was
written just on the value of the property and the age of
the borrower because there are no payments. but there
still needs to be sufficient cash flow within the household to be able to pay taxes and insurance and meet all
day-to-day needs. fHa will come out with a proposed
rule probably sometime in the second quarter, and
then the final rule will come out later in the year. In the
meantime, some companies have begun to add in an
assessment of this sort, so NrMLa put out guidelines
this past October so [lenders] would have some ideas
to work with.
What will reverse-mortgage volume
look like this year?
There’s continued decline in property values in most
markets, but once prices stabilize and begin an upward trend, we’ll see a pick up. In October 2010, fHa
introduced a new version of the HECM that they call the
HECM Saver, which has a much lower upfront mortgage
insurance premium in exchange for a slightly lower pay-out. borrowers get 10 to 18 percent less, but to people
who need less money or who are using it just as a
standby reserve, it makes the product much more attractive. We expect to see a lot of growth in that area.
Jennifer E. Garrett is the editor of Scotsman Guide. reach her at
(800) 297-6061 or email@example.com.