Good News/Bad News for Mortgage Lending in 2014
December 02, 2013Good News First. The loan limits for conforming loans and FHA loans will not change in the new year!
This news might not sound like a big deal, but in reality it is huge. The government has been trying to come up with a way to get out of the mortgage business. Due to the outright ownership stake that "We the People" have in Fannie Mae and Freddie Mac, and the guarantees that we are on the hook for with VA and FHA loans, the government owns a large portion of the mortgage business in the United States.
One way for them to get out of that business is to reduce the loan limits on various loan products. Loans that adhere to Fannie Mae and Freddie Mac guidelines are called "conforming loans." The conforming loan limit nationwide for a single family home is $417,000. So a loan that will be sold to Fannie or Freddie must be at or under that amount.
In an attempt to bolster the housing market after the latest crash, there was an additional set of loan limits created that are called "high balance conforming loans." This loan limit varies by county across the U.S. Currently, in San Diego County the high balance conforming loan limit is $546,250.
At some point the high balance limit will be reduced and eventually eliminated. The next step will be to lower the conforming loan limit until it also disappears. The thought (hope) is that private investors will step in and take over investments in the secondary mortgage market. An even bigger hope is that when this happens, mortgage rates won't skyrocket.
FHA loans in San Diego County have a limit of $697,500 for single family homes. This amount is a tremendous increase from what was traditionally a loan product developed to help first-time home buyers, low-income buyers, and people with credit challenges, be able to buy a home.
Another way to reduce the use of any loan product is to make it more expensive. FHA loans have been on this path for some time. The cost of an FHA loan versus a conventional loan can be over $10,000 at origination and almost $900 per month extra in payments.
I expect these fees to keep increasing and the FHA loan limits to decrease over time. For now though, the current limits remain the same in the new year, which is a good thing.
With good news like that, who needs bad news?
The Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules go into effect in January. A detailed discussion of these rules is beyond the scope of this article. Suffice it to say that underwriting guidelines are going to become tighter, resulting in fewer borrowers who are able to qualify for a real estate loan.
The rules are not yet finalized but for the most part, lenders will be reluctant to make loans which are "risky" — as defined by Washington. Less risk may be good in general, but less lending as a result of unreasonable risk aversion won't be a good thing for the housing recovery.
The end result here, in my opinion, looks like a very rocky road for buyers.
John Yeager is the Valley Center Branch Manager for Summit Mortgage, NMLS #219612. He can be reached at 760-749-8931 or by visiting www.john-yeager.com, or via email at firstname.lastname@example.org