High-cost mortgages just got cheaper

The size of loans that can be guaranteed by Freddie Mac and Fannie Mae was raised today by the Office of Federal Housing Enterprise Oversight. The new, higher loan limits will stay in effect through the end of the year, allowing the government sponsored enterprises (GSEs), to buy much higher-priced mortgages in some areas of the country.

Also today, the size of the loans that the Federal Housing Authority (FHA) can insure was raised by Housing and Urban Development (HUD).

Both moves will lower borrowing costs for buyers of higher priced homes, and aim to boost flagging real estate markets.
Best time to buy a home in four years

Previously, Fannie and Freddie could only insure mortgages of up to $417,000, called conforming loans. That meant, assuming a 20% down payment, that only buyers of homes costing $521,500 or less were eligible for mortgages with GSE backing.

The new loan limits for Fannie and Freddie vary by area based on local median home prices and go as high as $793,750 in Honolulu. (For details, see table below).

Loan limits for FHA-insured loans were even lower; no more than $362,790. Now mortgages of up to $729,750 will qualify for FHA insurance.

The problem was that there are whole swaths of the nation where the typical home cost far more than that, and non-conforming or "jumbo loans" carry interest rates of about a point higher. For a $500,000 mortgage, that's an additional spending of $330 a month.

In many parts of the country prices are much higher. In San Jose, Calif, the median priced home costs nearly $850,000, according to the latest figures from the National Association of Realtors. In San Francisco, the figure is nearly $780,000; in Anaheim, Calif.; $657,000; in Honolulu $625,000; and in the New York metro area, $525,000. That means more than half the loans in those markets would not qualify under conforming loan limits.

"Families in high-cost states have been priced out of FHA-backed loans," HUD Secretary Alphonso Jackson said earlier today, in a speech before the Las Vegas Association of Realtors. "This has created a vacuum, filled by exotic subprime loans."

During the liquidity squeeze that began during the summer of 2007, jumbo loans became very difficult to find even for well-qualified borrowers. that made it hard to buy homes in certain regions, freezing up real estate markets.

By making it easier for buyers to get loans, regulators hope to get these markets moving again.

The new loan limits affect 71 metropolitan areas, as well as 21 counties outside of those metro areas.