Raised Limit Conforming Loan Explained
A: A great topic that is often misunderstood! With the new jumbo loan limit being raised from $417,000 to $729,750, expanding what counts as conforming and therefore a lower rate, cheers are being hollered that this will save the markets, yay! Not so fast. Now that the plan has recently took effect, some buyers who fit into the subset of this plan and can take advantage of the conforming raised loan limit, are finding that the rate is higher than normal conforming loans? What gives? The answer lies in a little 2 point fee that the GSE's are charging for this raised limit product and is being priced into the rate; therefore making the raised jumbo loan limit having a raised rate as well!
From one of my anonymous mortgage insiders that I know, trust, and works as a loan officer at a major bank:
Rates for the new limits vary depending on product. In this example, I will use a 30 Year Jumbo Mortgage vs. a 30 Year Raised Limit-Conforming Mortgage, in Manhattan with a loan amount of $700,000 - on a Purchase transaction.The key phrase is: The fee for doing a loan under the new limits is 2 points, but that fee gets built into the pricing of the rate. Take a look at the conforming rate of 5.875% compared to the raised conforming loan rate of 6.875%! In this case, for a loan of $700,000 and zero up front points, the two point fee translates to a 1% HIGHER RATE!
30 Year Raised Limit - Conforming: 6.875% @ 0 points
30 Year Jumbo: 7.375% @ 0 points
Keep in mind that, under the new limits, CO-OP's are not allowed any financing; They have to be financed under traditional loan limits. For example, on a co-op purchase with a $417,000 loan amount, a conforming mortgage currently yields a rate of 5.875% @ 0 points.
The fee for doing a loan under the new limits is 2 points, but that fee gets built into the pricing of the rate.
No matter what the loan limits or products are, strict underwriting is a standard in the current mortgage environment. There is very little margin for error, and overall banks are taking a very conservative approach when it comes to lending money.
**Also please note that the rates quoted above are as of today, Tuesday April 8th, 2008, and are subject to change.
The new raised limit rate is better than the jumbo rate, but still misleading given the announcement of the stimulus plan back in January. This explains why the rate is higher for any buyer who tried to take advantage of the jumbo limit being raised! There is no such thing as a free lunch! Two points is in essence 2% of your loan amount that will be built into the interest rate (not sure of exactly how) over the course of the loan.
Posted by Pool Shark
Tue Apr 8th, 2008 04:00 PM
The news is even worse than you think Noah...
A little known fact: The conforming limits for many counties were actually lowered to well under the old $417k!
See the following clickable map of rates from BankRate.com:
http://www.bankrate.com/brm/news/mtg/20080307_FHA_new_loan_limits_map_a1.asp
For my county, the conforming rate went from $417k to only $368k.
The fed giveth, and the fed taketh away...
Posted by Ethan
Tue Apr 8th, 2008 04:10 PM
I was waiting for these limits to be defined as my wife and I are buying in LIC and could have taken advantage of the Jumbo Conforming loan if they didn't bake in that 2%... difference between what was advertised and what came to be is 100 basis points (1%) which really doesn't help. A mortgage broker that I'm working with said that after he saw the new fees baked into the Jumbo conforming loans, he said that the over under for people using this product will be 10... 10 loans. Given that the HELOC (Home Equity Line of Credit) rate is so low right now, it doesn't make sense to take a jumbo loan out when you can break the loan up into two using a HELOC at a rate of 5.375%. That floats to the fed funds rate but given that I think the Fed has at least one more cut in them and then they'll hold for a bit, that rate won't come close to a fixed rate second at 8% any time soon. Too bad the Jumbo conforming didn't come through as advertised.
Posted by mortgageman
Tue Apr 8th, 2008 04:30 PM
Pool Shark -
The link that you provided is for FHA mortgages, not the GSE's Fannie Mae/Freddie Mac.
This is VERY important to remember as they are two completely different government entities.
For a list of counties with new loan limits go here: https://www.efanniemae.com/sf/refmaterials/loanlimits/jumboconf/xls/loanlimref.xls
Good Luck!
Posted by Noah
Tue Apr 8th, 2008 04:46 PM
thx mortgageman! Very useful link!
Posted by Pool Shark
Tue Apr 8th, 2008 05:34 PM
mortgageman:
Ooops.
I thought something looked amiss when I checked BankRate's map and found a limit less than $417k. Didn't realize the listed numbers were for FHA mortgages.
Thanks
Posted by Paul
Tue Apr 8th, 2008 08:08 PM
Fact-The new jumbo loan limit does NOT apply to Co-ops..Co-ops are over 75-80% of all Manhattan inventory..This does very little to help the Manhattan market.
Posted by cwmortgage
Wed Apr 9th, 2008 12:42 AM
The new conforming rates for loans above 417k are higher but lower than standard jumbo 30 yr fixed. Was it 6.875% today? It was 6.625% with us at Countrywide.
Posted by jt
Wed Apr 9th, 2008 09:22 AM
I think that Noah's article was trying to point out the added fees and not to expect that rates will be equal to conforming loans BUT they are lower. If you had to get a 700K mortgage today, you would be paying less even with the added fees.
Posted by Noah
Wed Apr 9th, 2008 09:43 AM
Yes! I even pointed out that RAISED LIMIT CONFORMING is still lower than Jumbo rates, yet higher than conforming and that is misleading since everyone thought this new plan would allow them to get a 417K-700K loan for a conforming rate; NOT SO!
Posted by E in NYC
Wed Apr 9th, 2008 10:54 AM
One question: WHY? If Fannie/Freddie are buying these loans the same way they were buying the old $417K loans, why the extra fee?
Posted by Noah
Wed Apr 9th, 2008 11:06 AM
E in NYC - because they are taking on ADDED RISK as a result of the raised limit, and need to get something somewhere for it! There is no such thing as free lunch. Everyone always cheers without understanding things, and expect it to be totally free. Not so. Understanding is the best thing we can do with these gov't types of sponsored programs.
Posted by E in NYC
Wed Apr 9th, 2008 11:19 AM
Then perhaps you can help me understand: if rates reflect risk, why are the banks taking on NO added risk when moving from a $200K loan to a $417K loan, but ARE taking on added risk when moving from a $417K loan to a $634K loan (both jumps of $217K)?
I always thought 'jumbo' rates differed because gov't wouldn't back the loans, but now they will. Are Freddie Mac and Fannie Mae not buying/insuring loans from $417K to $729K the same way as for loans under $417K?
Posted by Noah
Wed Apr 9th, 2008 11:44 AM
as far as I understand and think, the higher the loan amount, the bigger the risk. Thats the only answer that pops into my head. The GSE's are expected to make money, and have proven very good at not being able to do that. So, the new raised limit loan product, MUST, and I stress MUST, have some sort of built in hedge against risk and way for the GSE's to make some $$$ of the product. This explains the built in rate term.
Moving from 200K to 417K is taking on more risk, but consider the market in BULK America! Most people buy homes for under 400K! Adding this fee to his segment of the market will do way too much harm! The fee is intended as a minor luxury tax, so to speak, for accessing the raised conforming limit product.
They are insuring these loans the same way the insure conforming, but the new product bears more risk, and as such has this built in hedge.
Posted by ben s bernanke
Wed Apr 9th, 2008 12:57 PM
what is ethics?
Posted by E in NYC
Wed Apr 9th, 2008 05:15 PM
I just don't buy it: the whole reason there is such a thing as a JUMBO mortgage is because until now, Freddie/Fannie would not buy/insure mortgages over $417K on the secondary market. As such, banks charged a higher rate to take on the add'l risk because they couldn't offload the loans. That's the ONLY reason JUMBO mortgages carried higher rates, and with that reason gone, there's no reason for a higher rate other than collusion among lenders.
If larger loans were inherently riskier, rates would ratchet up with the size of the loans, and the rate on a 100K loan would be tiny (2%?) while a loan of 10 Million would be huge (15%?). That's never been the case and shouldn't be invented now as justification.
Posted by Bee Dub
Wed Apr 9th, 2008 07:22 PM
The thing that bothers me is the exclusion for co-ops. I read the actual law, and it says nothing about co-ops. This exclusion is something that either the banks or Fannie/Freddie invented. I would be please to see someone sue that the co-op exclusion is against the law.
FYI, I just got a 7-year IO ARM for 5.6% on a $500k loan (75% LTV) for a Bronx co-op. I was hoping to get 5.6% on a 30-year fixed, with this new law. But alas, no dice.
Posted by mortgageman
Wed Apr 9th, 2008 10:34 PM
Bee Dub -
Not sure which law you are referring to, but Fannie Mae/Freddie Mac (the ones securing the new loan limits) get to decide which loans they will and will not secure for secondary market purposes.
That said, please go here and turn to page 5: https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0805.pdf
You will see, that under the raised loan limits they will not secure a number of different types of loans INCLUDING co-op's.
Also please do not forget that you, as a borrower, now have the option of using the old loan limits (which allow co-op financing) or the new loan limits, which don't.
By the way, even if co-op's were allowed financing under the new loan limits, you would still not have been able to get an ARM, at that rate, because Fannie/Freddie will not accept them until May 1st.
Posted by mortgageman
Wed Apr 9th, 2008 10:53 PM
E in NYC:
You are 100% correct. These new loan limits are an enormous contradiction.
As soon as the stimulus package was announced, everyone in the mortgage industry, including me, was ecstatic. Can you imagine doing a $700,000 loan at a rate of 5.625%?? That would be tremendous for business!
However, what no one actually considered was that Fannie/Freddie are in a very bad financial position; they have loans defaulting left and right, and cannot afford the added risk. As a result, when the new guidelines were announced, all of us were extremely disappointed.
Can you imagine working in Manhattan and not being able to accommodate a co-op loan? I mean you still can, but not under the new loan limits.
Can you even fathom the thought of not being able to perform a cash-out refinance for those people who have 2 mortgages and want to combine them into one, without building 3 points into the rate?
Yes, I agree with you that these new limits do not make much sense. But as Noah mentioned earlier, THERE IS NO SUCH THING AS FREE LUNCH.
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Posted by Mbt
Wed Jun 2nd, 2010 11:43 PM
I think another reason fees are not being paid and free months not offered is that prices have come down. Apartments are moving but part of the reason is that prices came down to a point at which they will move.
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