Banks eager for drop in federal loan limits
WASHINGTON — How big a deal is the upcoming cutback in mortgage limits for Fannie Mae, Freddie Mac and the Federal Housing Administration? Will buyers and sellers who depend on jumbo-sized loans find themselves in a financing squeeze after Oct. 1, when the limits plunge in key markets?
Housing and realty lobbies are pushing hard on Capitol Hill for a continuation of the $729,750 high-cost area maximum, but one industry is delighted by the prospect and is gearing up to fill the gap.
From small community banks to megabanks, the message is the same: Bring on the switch to lower limits; we plan to expand our jumbo loan business wherever market demand requires. There will be no financing squeeze for anyone who needs a mortgage too big for Fannie, Freddie or FHA, provided the applicant is creditworthy and has enough of a down payment.
Congress raised conventional and FHA limits during the economic crisis to ensure access to capital for buyers and refinancers. The limits are scheduled to adjust downward Oct. 1, unless lawmakers agree to extend them, which would run counter to calls from Republicans and the Obama administration to curb the federal footprint in the mortgage arena.
Federal guarantees support loans purchased, securitized or insured by Fannie, Freddie and FHA, putting taxpayers' dollars at risk in foreclosures. Fannie and Freddie together have sopped up more than $150 billion in direct taxpayer assistance since being placed in federal conservatorship three years ago because of loan defaults.
On Oct. 1, the maximum loan at each of the three federal mortgage giants will fall to $625,500. Though the upper-limit decline is only $104,250, some realty and business analysts worry that buyers needing big mortgages will be forced to make much heftier down payments, pay higher interest rates or be prevented from purchasing the house they want.
Bankers say those worries are overblown. Cam Fine, president and chief executive of the Independent Community Bankers Association, says his 5,000-plus members plan to take up the slack in the jumbo arena and have the financial capacity to do so. Community banks, which generally have up to $20 billion in assets, "are very adept at creating products that fit the needs of customers," Fine said.
Matt Vernon, national mortgage sales executive for Bank of America, the nation's largest by assets, said his institution has been aggressive in the jumbo segment for more than a year and plans to pick up the pace. Bank of America funded $4.1 billion in jumbos during the first quarter of this year alone.
Meanwhile, interest rates on jumbos are near their lowest ever — about 5 percent for 30-year fixed-rate loans, 3 percent for some hybrid adjustables. Spreads between conventional loans and jumbos have narrowed from 200 to 250 basis points (2 to 2.5 percent) three years ago to just above half a percentage point today. On loans of $400,000, Bank of America is offering "5/1" adjustables at 3 percent plus 0.875 points. A 5/1 loan's interest rate is fixed for the first five years, then converts to a one-year adjustable. A 5/1 loan of $800,000 goes for 3.5 percent with 0.875 points. Other big banks have competitive terms.
Noah Wilcox, CEO and vice chairman of Grand Rapids State Bank in Grand Rapids, Minn., says community banks like his can tailor mortgages because they retain all the loans in their own investment portfolios.
"We've seen jumbos with 10 percent down payments" and other exceptional terms for clients, he said. Based on the borrower's income and assets and the value of the house, "if it makes sense" his bank will try to do it — or at least consider it.
Bankers' expansion plans and promises notwithstanding, there are sobering realities home buyers seeking jumbos are likely to find when Fannie, Freddie and FHA are out of the picture. Tops on the list: If you thought underwriting standards are strict now, be prepared for even tougher evaluations.
Second, unlike at nondepository mortgage companies, banks prefer to do jumbos primarily — or solely — for established customers.
Kenneth R. Harney can be reached at email@example.com.