Rates On Bigger Mortgages Finally Should Come Down

By Kathleen Pender
Thursday, April 23, 2009

Home loans from $625,500 to $729,750 in high-cost regions, including most of the Bay Area, should get cheaper in the next few weeks. To make bigger mortgages cheaper, the economic stimulus act passed in February increased the conforming loan limit in high-cost regions to a maximum of $729,750 from $625,500 for single-family homes through the end of this year. The conforming-loan limit is the biggest mortgage that can be purchased by Fannie Mae and Freddie Mac. Anything over the limit is called a jumbo loan, and they cost considerably more than conforming loans because Fannie and Freddie can't buy or guarantee them.

Raising the limit should bring down the price of loans between $625,500 and $729,750. But more than two months after the stimulus bill was signed, loans in that zone are still being priced like jumbo loans. Why? Lenders say they couldn't lower their rates until Fannie and Freddie issued underwriting criteria. Fannie issued its criteria March 30 and Freddie on April 16. Both will start buying loans of up to $729,750 from lenders on May 4.

That opens the door for lenders to begin making them. Wells Fargo says it will start making conforming loans of up to $729,750 on Monday. Bank of America will begin making them "by mid-May," says Vijay Lala, a product executive with the bank. As they and other lenders start making these loans, the price should come down. By how much remains to be seen.

Before last year, the conforming loan limit was the same across the continental United States.
Last year, Congress pegged the limit to median home prices in each region, with a minimum of $417,000 and a maximum of $729,750 for single-family homes. Later in the year, Congress changed its formula for calculating the regional limit, which dropped the maximum to $625,500 after the end of 2008. (Different limits apply to homes with two to four units.)

This has created two tiers of conforming loans. Those below $417,000 are true conforming; those above are often called super-conforming. Super-conforming loans have always cost a bit more than true conforming loans, partly because an industry group has decided that certain securities backed by conforming loans can't have more than 10 percent super-conforming.
The interest rate on a super-conforming loan is typically one-fourth to one-third of a percentage point higher than the rate on true conforming loans, says Keith Gumbinger, a vice president with HSH Associates. But Dick LePre, senior loan officer with RPM Mortgage, says super-conforming rates are "gigantically volatile from day to day."

It's not clear whether banks will price loans between $625,500 and $729,750 the same as loans between $417,000 and $625,000 or create a third tier of conforming loans. Brad Blackwell, national sales manager for Wells Fargo Home Mortgage, says his firm will price them the same.
On Wednesday, Wells was charging about 4.75 percent on a true conforming loan below $417,000, 5 percent on a super-conforming loan up to $625,500 and 6.25 percent on a jumbo loan above $625,500. If the new conforming loan up to $729,750 had come out the same day, it also would have been at 5 percent, Blackwell says. (All rates are for 30-year fixed-rate mortgages.)

Bank of America's rates for a 30-year fixed-rate loan were 4.875 percent for true conforming, 5.25 percent for super-conforming up to $625,500 and 6 percent for jumbos over $625,500. Lala also says BofA will price loans between $417,000 and $729,750 the same. Even if they are priced the same, it could be harder to get a conforming loan up to $729,750 than one up to $625,500.

Fannie and Freddie will, in some cases, buy true conforming loans for up to 95 percent of the home's value, but on loans up to $625,500, the loan-to-value ratio can't exceed 90 percent.
On loans up to $729,750, Fannie will go up to 90 percent loan-to-value but Freddie will only go as high as 80 percent. Fannie and Freddie will require a "field review" by a second appraiser on loans that are greater than $625,500 and more than 80 percent of value. John Abraham of Redwood City is eagerly awaiting the new loans. The rate on his $690,000 loan has been fixed for almost six years, but it will start adjusting in a year or so and he's very worried.
He would like to refinance into a fixed-rate loan. All he can get now is a jumbo at close to 6 percent, which would make his payments soar. If he got a conforming loan around 5 percent, he could afford the payments and relieve a major source of stress. "Our main objective is to create long-term stability for our family," he says.