Jumbo Dilemma Looms

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6 · 08 · 11

In just a few short months, temporary loan limits in high-cost areas that were established at the height of the financial crisis will disappear. But the loan limit on federally insured reverse mortgages was permanently raised — making it a viable option for some borrowers on purchase-money loans in excess of $417,000.

In February 2008, the Economic Stimulus Act of 2008 temporarily raised the conforming and Federal Housing Administration loan limits in high-cost areas to 175 percent of the $417,000 conforming limit — or $729,750.

In February 2009, Congress enacted the American Recovery and Reinvestment Act, which kept the temporarily higher limits in place. Legislators extended the higher limit in 2010 and again through Sept. 30 of this year.

But this February, the Obama administration presented a plan to reduce the government’s role in mortgage lending — including letting the temporary higher limits expire.

“Barring Congressional action, FHA loan limits will revert back to loan limits determined under HERA for loans insured by FHA on or after Oct. 1, 2011,” a Market Analysis Brief prepared by the Department of Housing and Urban Development’s Office of Housing/Risk Management and Regulatory Affairs/Evaluation and released last month said.

The brief estimated that the declining limits will impact 669 U.S. counties that were eligible for the temporarily higher FHA limits.

Had the higher limits not been in place last year, the report estimated that more than $14 billion in FHA-insured loans would not have been made. That works out to roughly 6 percent of total FHA fiscal-2010 originations by dollar volume. In addition, another $2.8 billion in endorsements would have evaporated between Jan. 1 and April 30 of this year.

The study found that in Connecticut, where 1 percent of all U.S. FHA loans are originated, volume is likely to be reduced by 15 percent as a result of the lower loan amounts. It’s the biggest impact that the lower limits will have on any state.

Other states to see declines of more than 5 percent as a result of the lost limits are Arizona, California, Colorado, Connecticut, District of Columbia, Massachusetts, Maine, New Hampshire and Oregon.

So what are borrowers who need more than $417,000 after Sept. 30 to do?

Many will look to their banks that invest in jumbo mortgages for their portfolios.

Another possibility is that some will migrate to federally insured reverse mortgages.

The loan limit on home-equity conversion mortgages was permanently raised to $625,500 as a result of the American Recovery and Reinvestment Act. And the Housing and Economic Recovery Act made it possible to utilize HECMs for home purchases.

So, in some cases, HECM-qualified borrowers might look to HECMs for purchase-money loans in excess of $417,000 and up to $625,500.

But don’t look for a rush to HECM products for jumbo purchases based n HUD’s outlook.

“We do not currently expect an increase in HECM for purchase loan activity,” a HUD spokesman said in written statement.

Mortgage Expert

Mortgage Daily Staff