New Mortgage Rules Could Make Homes Harder to Buy and Sell This Fall

If you're thinking of buying or selling a home with a high price tag, a pending change to federal mortgage regulations could make that proposition a bit more expensive -- and difficult -- come this fall. Starting in October, the maximum mortgage amount for loans in high-cost areas that are guaranteed by Fannie Mae and Freddie Mac is scheduled to drop from its current limit of $729,500 to $625,500. Mortgages above that limit typically charge a half percentage point more in interest, so this means buyers and sellers at high price points could have a new headwind to contend with. There's a growing buzz among Washington stakeholders this week that the time is right to let this "conforming loan" limit drop as a first step in weaning the mortgage market from its outsize dependence on government support ever since the financial crisis began.

In fact, get ready to hear plenty in the coming days and weeks about big sweeping plans to reform the mortgage market. With Fannie Mae and Freddie Mac essentially wards of the state since the financial crisis struck, the Obama administration is readying a report that will offer long-term proposals for reducing the role of the federal government in the mortgage market. Here are some key points to keep in mind as the debate heats up:

• The lower $625,500 conforming-loan limit is already on the books. Even if there were quick agreement on what to do with Fannie and Freddie over the long-term, implementation of any sweeping changes would be phased in over years, not weeks or months. The conforming loan limit is an entirely separate issue. If Congress does nothing between now and October, the current reg will automatically kick in and reduce the conforming loan limit to $625,500.

• Mortgages above $625,500 will likely become more expensive. There are essentially three tiers to the mortgage market. Anything below $417,000 is considered a "true" conforming loan. Between $417,000 and $729,500 is another tier, referred to as "conforming jumbo" or "high-limit conforming." And loans above $729,500 are considered "true" jumbos. The first two tiers are eligible for federal guarantees, but true jumbos are not.

According to Keith Gumbinger at mortgage-data firm HSH Associates, here's the current breakdown of average 30-year fixed rate mortgage rates qualified borrowers are likely to be offered today, based on which tier they fall into:

o True Conforming ($417,000 and lower): 4.93 percent + 0.28 points

o Conforming Jumbo: (417,000-$729,500): 5.06 percent + 0.32 points

o True Jumbo (above $729,500): 5.57 percent + 0.37 points

Anyone considering buying or selling a home in the middle-tier conforming jumbo range take note. Right now you might be able to qualify for a mortgage rate that is half a percentage point lower than what "true jumbos" cost. Come October, if the limits change, you could suddenly find yourself pushed into that higher "true jumbo" tier. At current interest rates, someone in the market for a $650,000 mortgage could potentially see their monthly mortgage payment on a 30-year fixed rate rise $200 a month simply because their loan switched from jumbo conforming to true jumbo. So if you're on the fence waiting for prices to stabilize or improve in your area, you should also throw in this potential financing factor into your calculus.

• You'll also have to jump through more lender hoops. Prior to the financial crisis, the private loan market -- that is, bank loans that weren't dependent on federal backing -- accounted for about half of all loans. Today, private loans are less than 10 percent of the market. Allowing the conforming loan limit to fall back to $625,500 would be sort of a litmus test to see if the private loan market is ready and willing to get back in the game. Granted, $625,500 is still a whole lot higher than the old pre-crisis limit of $417,000, but the big issue here is whether the private loan market will quickly and seamlessly step in and get back to providing high-end mortgages, and at what cost. To be sure, if there are hiccups along the way, the impact will only be on the high end of the market; it's not lost on Washington that the average home price is now well under $200,000, so there will be no disruption for most Americans.

But if you happen to live in a high cost area, navigating the mortgage market could become even more confounding in the fall if your lender isn't able to fall back on a federal guarantee of your loan. It wouldn't exactly be a surprise if lenders are a tad cautious as they venture back to standing on their own two feet. Indeed, getting a mortgage is already plenty confounding these days. As the Wall Street Journal reports, buyers flush with cash are so fed up with the requirements to qualify for a mortgage that they are increasingly skipping the mortgage altogether and paying all cash upfront.

That's a nice solution if you, in fact, have all that cash handy. But if you're likely to need a large mortgage as a buyer, or you are a seller whose prospective market will need that large mortgage to buy your house, you might want to prepare yourself for lenders imposing tough standards. For example, at high "jumbo" price points, down payments of 20 percent or even 25 percent are not uncommon.

• We may be entering a permanent age of 20 percent down payments. High down payments may not just be a temporary post-crisis response limited to the high-end of the market. One of the long-term reform proposals being bandied about Washington would require that any loan a lender wants to sell outright into the secondary market be secured by at least a 20 percent down payment. Anything below that amount and the lender would be required to hold onto at least 5 percent of the loan value in its own investment portfolio. That's how you keep lenders from doling out high-risk loans. A good move for the financial system, to be sure. But one that could ultimately make home buying a more expensive proposition in the future, raising the allure of renting rather than buying for many, no doubt.

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