What new jumbo mortgage rules mean for expensive zip codes

September 8, 2011

On Oct. 1, the size of mortgages eligible for purchase by Fannie Mae and Freddie Mac will shrink. That isn’t necessarily a big deal in most parts of the country; the new lower limit of $625,500 — down from today’s $729,750 — still is big enough to cover most homes in almost all markets in the United States.

Furthermore, mortgage bankers are stepping up with new money to cover those bigger loans, reports Mortgage Daily. “Programs here and there are popping up,” says publisher Sam Garcia. He reports that some new lenders, including TMS Funding and New Penn Financial LLC, are launching programs that will make mortgages as big as $2 million available to lenders with good credit scores and enough cash to keep up with the payments. And many existing mortgage lenders currently will make those so-called “jumbo” loans and just keep them in their portfolios instead of selling them.

But those loans will cost more. Currently the difference between rates on so-called conforming loans and private-made loans is about 0.64 percent. Over the last two years that spread has been as low as 0.48 percent and higher than one percent, says Garcia.

So in some pricey places, the new limits will really pinch borrowers. Those limits vary from market to market and are determined in part by local housing prices. In expensive housing markets where prices have fallen, the limits will drop the most. Hardest to be hit, according to a new analysis by Move.com, will be San Diego, where loans up until $697,500 qualify for Fannie and Freddie until Sept. 30. On Oct. 1, that limit drops to $546,250, a $151,250 difference.

Folks there who want to borrow a bunch for a home will see their costs rise significantly. A San Diego homebuyer who needs $600,000 would pay $2,937 a month for a 30-year loan at today’s rate of 4.18 percent, according to Bankrate.com. Starting next month, if rates stay stable and that borrower goes to a private lender, he would pay $3,155 a month. That’s $228 more a month, or $82,080 more over 30 years.

Some buyers (and lenders) may try to get around that by piggy-backing loans; piling a smaller non-conforming loan onto a conforming loan.

Here are some other areas, most often searched on Realtor.com, that could see significant changes in their loan limits, according to the Move analysis.

Market Current limit Limit after October 1 Reduction in limit
San Diego $697,500 $546,250 $151,250
Fairfield, CT $708,750 $575,000 $133,750
Los Angeles $729,750 $625,500 $104,250
Washington, DC (most counties) $729,750 $625,500 $104,250
Orange County, CA $729,750 $625,500 $104,250
Riverside-San Bernadino, CA $500,000 $417,000 $83,000
Baltimore (most counties) $560,000 $494,500 $65,500
Boston (most counties) $523,750 $465,750 $58,000

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These numbers were in place a year ago. Like them or not they will provide some certainty for real estate valuations which may help stabilize the market. Sellers will need to adjust their numbers accordingly and those refinancing are likely to be asked to bring money to the table.

Posted by TreeMcGee | Report as abusive

It still seems awfully high. If you can afford a $700,000-$800,000 house, dont buy one. Havent we learned anything over the last 5 years?

Posted by dude. | Report as abusive

meant to say “can’t afford”

Posted by dude. | Report as abusive

“… as big as $2 million available to lenders with good credit scores and enough cash to keep up with the payments.” Why not “available to borrowers” ???

Posted by Loanpro | Report as abusive

High is relative term. The point is the government makes an arbritary line that impacts people. We have 1,000,000 dollar loan for a 1,900,000 property. Our income is about 600K/year and we live in a nice but pretty normal 1800 square foot apartment in Manhattan. By brother lives in Charlotte and has a similar ratio of house price, mortgage, and salary but the amounts are much less. His home is slightly larger than hours.

We consider ourselves in the same quality of life for our families and children – the only difference is the cost of living. Effectively the government subsidizes his jumbo loan but not ours when the risk is the same. This is just due to living in a more expensive place. The government should back up any JumboLoan to any amount if the buyer has the downpayment and salary to cover OR they should not subsidize any loans.

Posted by John2244 | Report as abusive

If you want to borrow at lot of money to purchase a home, it’s now going to cost you more. Big deal. If that’s a problem, don’t buy it. Period.

John’s argument makes sense to some degree, but it’s not just about ratio, it’s about price. A larger loan amount is a larger loss if it defaults. There’s no ratio involved with that. If there weren’t definite economic gains to be had by living places with very high costs of living, people would live elsewhere. If you want the benefits, pay the cost. It’s pretty simple. Most likely, the benefits are still going to outweigh the costs.

Posted by Adam_S | Report as abusive

John2244, I fail to see why New Yorkers believe that their life style costs should be imposed on the rest of the country in terms of taxation, which is exactly what happens when the insolvent Fannie or Freddie backs up mortgages, to get the interest rates down. Actually, neither agency should exist, but, to the extent it does, it should only insure average Americans, not wealthy New Yorkers, who happen to be living a lesser lifestyle solely because they are competing for space with other wealthy New Yorkers. This attitude is the same one that fleeced the world and caused the World Financial Crisis.

Posted by JimSwitzer | Report as abusive

John2224 – the government may subsidize Charlotte more than NYC by making a greater percentage of homes eligible for GSE purchase, but one could also argue NYC and specifically Wallstreet has benefitted asymetrically from Treasury bailouts and Fed monetary policy. I live in San Diego in a high valued home, so this will negatively impact the value of my home. But I know I could always sell my home and move elsewhere if desired, using part of the equity to puchase a home outright and live off the remainder.

Posted by janonamous | Report as abusive