* Government removes support at upper end of home market
* New limits on Fannie, Freddie loans from Saturday
* Conforming loan limit falls to $625,500 from $729,750
* These borrowers face 50 bps increase in mortgage rates
* Realty experts fear damage to fragile housing market
(Adds Obama comments on housing market)
By Margaret Chadbourn
WASHINGTON, Sept 30 (Reuters) – Many homebuyers in the most
expensive U.S. real estate markets will face demands for bigger
down payments and higher borrowing costs starting Saturday.
Higher limits on the size of home mortgages that the
government buys or insures, which had been increased in 2008 in
order to provide liquidity to a mortgage market crippled by the
subprime meltdown, will expire on Oct. 1.
The cap on the size of so-called “jumbo” mortgages eligible
for government backing in the most expensive real estate
markets — including Washington, D.C., California and the New
York City metropolitan area — will fall to $625,500 from as
high as $729,750.
The cap, known as the confirming loan limit, determines the
maximum size of mortgages the Federal Housing
Administration, Fannie Mae and Freddie Mac can buy or guarantee
– a system designed to add liquidity to the mortgage market by
taking mortgages off banks’ balance sheets, allowing them to
offer new loans.
Analysts say the decrease will affect only a sliver of the
market, about 2 to 3 percent. But many say any decrease could
be harmful, given the already weak state of the housing
market.
“Why do any damage at all when the housing market is this
fragile?” asked Mark Willis, a research fellow at New York
University’s Furman Center for Real Estate and Urban Policy.
“We’re not debating the right levels for these loan limits, but
the question is, ‘Why do anything at this moment to weaken what
is already an unsteady market?’”
The reduction in the loan limit is part of an effort to
start reducing the government’s footprint in the mortgage
market and revitalize the role of private lenders — an effort
that has been backed both by President Barack Obama and Federal
Reserve Chairman Ben Bernanke, as well as some Republicans in
Congress and the FHA itself.
“The housing market is beginning to bottom out and mortgage
interest rates are at historic lows,” Obama said in a radio
interview on Friday. “Home ownership is still going to be a
central part of the American dream, and we want to encourage
that.”
As government support fades, some buyers who fail to meet
the standards of private lenders will be locked out of this
jumbo-loan market; others will face higher borrowing costs and
will need pristine credit histories to secure mortgages.
The average interest rate for a 30-year-fixed rate mortgage
for a non-jumbo loan is 4.05 percent, compared with 4.81
percent for a jumbo loan, according to Bankrate.com.
“It will reduce the buying power,” said Dan Laytham, a real
estate agent for Long Foster who has worked in the Northern
Virginia suburbs of Washington, D.C., for more than 20 years.
He expects the market for higher-priced homes in the area will
soften on the change.
WEANING THE MARKET OFF SUPPORT
The government now supports about 90 percent of the
residential mortgage market through loans financed by Fannie,
Freddie, and the FHA. The expiring higher limits at Fannie and
Freddie represented around 3 percent of the overall market in
2010, according to the regulator of the two firms, the Federal
Housing Finance Agency.
An estimated 40,000 to 45,000 borrowers annually will be
affected by the shift, representing about $30 billion in loan
originations, according to analysts at Credit Suisse Group AG.
They said the drop in the conforming loans limits would
likely raise interest rates on those loans by 30 to 50 basis
points, or 0.30 to 0.50 percentage point.
The FHA provides mortgage insurance to borrowers who might
not have a sufficient down payment to qualify for a prime loan
or who may not have high incomes. Buyers can put down as little
as 3.5 percent with an FHA loan.
BANKERS MOVE IN
When the current caps on conforming loans backed by the
government expire, banks will have an opportunity to increase
their share of the jumbo mortgage market, which can be
profitable and provide higher yields. But whether they will
and to what degree remains a big question.
“There is interest on the sidelines from private investors
to get involved in the jumbo loan market,” said Janaki Rao,
vice president of mortgage research at Morgan Stanley in New
York. “Those clean credit borrowers represent a higher yield
compared to what is carried in the conventional mortgage
market.”
Already active lenders in the jumbo market, major banks,
including Wells Fargo and Bank of America, originated $87
billion, or nearly half of all jumbo loans, in 2010, according
to Moody’s Investors Service.
Independent private mortgage bankers, local banks and
portfolio lenders also originate and service their own jumbo
loans.
(Reporting by Margaret Chadbourn; Editing by Dan Grebler)
Article source: http://www.reuters.com/article/2011/09/30/usa-housing-idUSS1E78T1KQ20110930