Bucks: How Lowering the Cap for U.S.-Backed Mortgages Will Affect Home Buyers

Peter DaSilva for The New York TimesLoans for homes in upscale areas like Monterey, Calif., may be affected by a new limit on federally guaranteed loans.

The approaching end of federal guarantees for very expensive mortgages is worrying potential home buyers — and sellers — in high-cost markets. Will they be able to get financing? How much more will they have to pay for that financing?

The limits on mortgages that can be backed by the federal government were raised in 2008 to ease the pain of the housing debacle in areas with high home prices. (Without government backing, many lenders would have refused to finance such loans when the housing bubble burst.) But the current higher limits are due to expire Sept. 30 unless Congress acts to extend them.

Groups like the National Association of Realtors are lobbying to extend the higher caps, arguing that removing them might cause further declines in home values, given the still-fragile housing market. But, as The Times reported Wednesday, that idea is meeting resistance from both Democrats and Republicans, who think it’s time for the private market, not taxpayers, to bear the risk of very big mortgages.

The impact of the coming change is expected to be felt well before Oct. 1, since most loans take more than a month to close. That means borrowers may confront the new criteria as early as this summer. To help put the change in perspective, Bucks asked Cameron Findlay, chief economist at Lendingtree, to outline a hypothetical example of a borrower who could be affected by the lower limits.

First, some background. Before the housing crisis mushroomed in 2008, the limit for a government-insured loan was $417,000 nationally. Loans above that amount were considered “nonconforming” or “jumbo” loans, in mortgage lingo, and carried a higher interest rate to reflect their higher risk. That loan limit still applies in most of the country, and borrowers seeking loans below that amount shouldn’t be directly affected by the coming change. But for the last three years, the formula used raised the limit to as much as $729,750 in areas with high median home prices. The move created a new tier of loans that were eligible for government backing but, in practice, still subject to slightly higher interest rates.

Now, a change in the formula that takes effect Oct. 1 will lower the maximum to $625,500. The change is expected to be felt especially hard in high-priced markets on the coasts, including California, New York, New Jersey and Washington. (For a detailed explanation of the formula and a rundown of its impact on various counties, see this report from the Federal Housing Finance Administration.)

Now, let’s consider the impact on Mr. Findlay’s borrower. Say “Joe Homebuyer” seeks a $700,000 loan today for a house in an upscale neighborhood. The loan amount falls between the “baseline” limit of $417,000 and the current maximum of $729,750. That makes it a “conforming jumbo” loan, in the latest lender parlance. Such loans carry a premium of about 0.10 percentage point over the going interest rate of 4.75 percent. So Joe’s rate today would be 4.85 percent, which translates into $42 more a month.

Here’s what happens after Oct. 1. Joe’s loan is still $700,000, but it’s over the new $625,500 maximum. It’s now a “true jumbo” — ineligible for federal backing — and subject to a higher premium of 0.60 percentage point, making the interest rate 5.35 percent. That’s a stiff $257 more each month over the going rate.

So in the end, Joe ends end up paying $215 more ($257 minus $42) per month under the new rules.

Mr. Findlay noted that all sorts of factors could affect an actual borrower’s interest rate, including his credit score and debt-to-income ratio. And the premium for jumbo loans, for example, could rise higher than 60 basis points, depending on the mortgage market. In the midst of the housing crisis, it was more than double that. “It can be substantial when the market is in turmoil,” he said.

Do you think the higher loan limits should be extended? Are you concerned about selling your home, or getting a mortgage to buy one, if the limits are not extended?

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