The move to lower loan limits is the first major effort by the federal government… (Tim Boyle, Bloomberg )
Uncle Sam is about to take a first tentative step out of the mortgage business by lowering the size of home loans that the federal government will guarantee, and it's already hitting California neighborhoods with higher costs and bigger down payments.
The downward adjustments have ignited outcries from California politicians and sparked a campaign by the state's largest real estate group and its national partner to extend the higher limits; they argue that the Golden State's housing market and economy can ill-afford another setback to recovery.
"This is just going to kill us," said Beth L. Peerce, president of the California Assn. of Realtors. "You don't want the real estate market to get any worse than it is, and it surprises me that our congressmen and senators don't understand that."
But with Washington focused on slashing deficits, few observers predict any further extension of the 3-year-old policy that was intended to throw a lifeline to higher-priced housing markets. Most of the nation's biggest mortgage lenders have already stopped making loans at the old limits, concerned that they will not be able to get them off their books before the official Saturday deadline.
The move to lower loan limits is the first major effort by the federal government to reduce its footprint in the mortgage market. The government currently supports about 90% of new mortgages — essentially propping up the home loan market after credit dried up and home sales plunged in the wake of the subprime mortgage crisis.
The loan limit determines the maximum size of a mortgage that the Federal Housing Administration, Fannie Mae and Freddie Mac can buy or guarantee. So-called nonconforming jumbo loans that are offered by the private mortgage market typically require bigger down payments and carry a higher interest rate, driving up monthly payments for borrowers.
In February 2008, with the housing market and economy reeling, Congress raised the limits for the types of mortgages eligible to be insured or bought by the FHA, Fannie Mae and Freddie Mac. The limits, which are based on a county-by-county analysis of home values, have been extended by Congress every year since to give housing a boost.
FHA borrowers in Los Angeles and Orange counties will see loan limits drop to $625,500 from $729,750, a decline of $104,250. Other pricey areas facing the same change include San Francisco, New York and Washington.
Under the new FHA loan limits, Monterey County would see the biggest drop in the limit, falling $246,750; followed by Merced, down $201,450; Riverside, falling $164,650; San Bernardino, declining $164,650; Solano, dropping $157,300; and San Diego, down $151,250.
Fannie Mae and Freddie Mac loan limits will also follow those changes except when they call for dropping the limit below $417,000, which was the old jumbo limit for Fannie and Freddie loans. When that happens, the limits will drop to no lower than $417,000.
Real estate professionals are bracing for the policy change to hit California hard, as buyers begin learning that they may no longer be able to afford the higher-priced homes they had been considering. The California Assn. of Realtors estimates that more than 30,000 California buyers statewide will face bigger down payments, higher mortgage rates and stricter requirements under the adjustment.
Syd Leibovitch, president of Rodeo Realty in Beverly Hills, said many deals by his brokers involve loans done at the highest amount allowed under the old limits.
"It is not going to be good," Leibovitch said. "The majority of our deals are 729-FHA loans because they are the easiest to qualify."
Sen. Dianne Feinstein (D-Calif.) co-sponsored a bill in early August that would allow the higher limits to stay in place for an additional two years. The real estate and mortgage industries also have been lobbying hard to keep those limits.
With the nation still recovering from the credit crisis, there is virtually no mortgage market outside the loans eligible for government guarantees. Still burned from the subprime mortgage meltdown, very few investors want to buy a mortgage unless it carries government backing, said Guy Cecala, publisher of Inside Mortgage Finance.
But as time runs out, pleas by industry groups appear to be going nowhere. The government is arguing that taxpayers can no longer afford the cost and risk of subsidizing home loans on a grand scale.
"Everybody is asking California to take one for the team," Cecala said. "It is the largest mortgage market in the country, it is the largest state in terms of mortgage activity and it is also the highest cost, where more mortgages are made at the limit than in any other state. It is basically ground zero to a downward adjustment in the loan limits."
The lower limits arrive at a time when lenders are eyeing borrowers more closely than ever to make sure they can make their loan payments.
Major banks are concerned about being forced to buy back loans that don't adhere to certain standards, so qualifying for mortgages has become an increasingly onerous task, with banks demanding more paperwork and higher credit scores.
"The bottom line is Fannie and Freddie will scrutinize any loan that has any performance issue," Cecala said, "so the way to avoid that as a lender is make sure that they are pristine."