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Jumbo Mortgage: Big Changes for Jumbo Loans

If you're buying an expensive home, get ready for some big changes for that jumbo loan you'll need to close on that purchase.

Late last week, George Washington University's Center for Real Estate and Urban Analysis (CREUA) released a study, co-authored by Dr. Robert Van Order and Anthony Yezer, professor of economics.

The report, entitled The Role of the Federal Housing Administration in a Recovering U.S. Housing Market, makes the argument that current FHA loan guarantees are bloated, obsolete, and in effect no longer useful in serving the FHA's traditional target audience of first time, minority and low income homebuyers.
To provide some context: Prior to the economic collapse in late 2008, the Federal Housing Administration could insure loans of up to $362,790 in higher cost markets, like San Francisco, California for example. But in response to the 2008 housing crisis, FHA loan limits were revised to insure mortgages of up to $729,750 in these high-end locales.

Lower cost markets, like say, Niagara Falls, New York, could take advantage of loan guarantees of up to $271,050. In a time before home values began to plummet precipitously and the foreclosure crisis reared its ugly head, the increases seemed prudent.

"FHA's expansion played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009," Van Order said. "However, we now are left with large loan limits that were set when home prices were at the top of the bubble. They don't reflect current market conditions and are unlikely to assist the FHA in reaching its historical constituencies â€" first time, minority and low income homebuyers."

Given that in our high-end example market of San Francisco, it is now possible to purchase a fancy loft or townhouse for less than $700,000 and in Niagara Falls, a four-bedroom, two-bath home can be yours for about $60,000, it's debatable whether the enhanced limits are still necessary to stimulate demand.

Even worse, according to Van Order, the FHA might be asking for trouble.

"It does appear to be the case in the FHA data that the higher balance loans have been a bit riskier. It's a question of transition," he observed. "At the height of the credit crunch, FHA became the lender of last resort, along with Fannie Mae and Freddie Mac. There was a vacuum. The central point is that the worst of the credit crunch is over, and FHA should get back to its central role. It's very difficult for them to be in the large market for a very long time. FHA runs the risk that by underwriting higher loans, they could be dumped on and lose money."

The Obama Administration has proposed a modest decrease in the upper FHA limit to $629,500, to take effect in October of this year. However, Van Order doesn't believe this goes far enough. Instead, the George Washington University report recommends a limit of $200,000 in lower cost markets, and $363,000 at the high end.

"What's happening now is that the upper limit is going down to $629,500, and even with the decrease, that's not a big part of the market after the loss of home values in the last few years. If you go down to $200,000, that would serve the traditional market. Loans over $350,000 tend to carry a higher default rate," he explained.

As you might imagine, the housing industry is highly defensive of any move to lower the upper FHA loan limit.

In a letter sent to Shaun Donovan, secretary of Housing and Urban Development, Timothy Geithner, secretary of the Treasury, and Gene Sperling, director of the National Economic Council, NAR offered a number of recommendations around financing that it believes would help stabilize and revitalize the housing industry and economy, including extending the FHA and GSE mortgage loan limits, which it believes are critical to providing liquidity in today's housing market. Reverting to the statutory limits on October 1 would reduce FHA loan limits in 669 counties and 42 states and territories - the average decline in loan limits will be more than $68,000.

(Not surprisingly, NAR is also adamantly opposed to increasing required down payments.)

The good news with jumbo loans is this: The jumbo loan market has come back to life. You can now get a jumbo loan for about 5 percent, or maybe a quarter to a half percent higher interest rate than a conventional loan. Anyone who wants a jumbo loan, and has the cash and credit to qualify for one, will be able to find it.

That certainly hasn't always been the case in the last five years.

What do you make of the Gorge Washington University Report? Is it time for the FHA to get out of the big loan business?
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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and The Equifax Personal Finance Blog, and is Chief Content Strategist at RealtyJoin.com, a community for real estate investors.
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