Tuesday, January 29, 2008

Conforming loan limit increase, two steps away.

Rates for some long-term mortgages are at their lowest levels in four years, the Federal Reserve is expected to cut some short-term interest rates Wednesday and proposals in Congress may soon allow thousands of jumbo loan borrowers to qualify for loans with lower interest rates.
The industry has not seen demand for jumbo mortgage loans at these levels since 2003.

Should you refinance?
The answer depends on a variety of factors: your' current loan terms, how long they plan to stay in your home, how much equity you have, your credit scores and more. It's deeply important to sit down and understand how all the pieces play together.

Help for the jumbo loan client is on the way. Economic stimulus legislation approved Tuesday in the U.S. House of Representatives includes a provision that would temporarily allow government-sponsored mortgage finance companies Fannie Mae and Freddie Mac to increase the conforming loan limit up to $729,750. The new conforming loan limit change is being anxiously awaited by all market participants as it is seen as the best part of the stimulus package. People are not excited about a check for a few hundred dollars when the prospect of not being able to refinance is real for millions of prime borrowers in adjustable rates who have little to no equity. The new requirements at most banks is to have at least 10% equity at the time of purchase or refinance. The new conforming loan increase would allow up to 100% loan to value.

Traditionally, the gap between conforming and jumbo loan rates has been narrower. What the credit crunch has done is led to, effectively, a buyers' strike among investors that buy jumbo mortgages because they are not backed by an implied government guarantee like conforming loans. Until more investors opt to purchase bonds backed by jumbo loans, the wider-than-normal gap in rates will remain. The best rates are available within the 5 and 7Y fixed jumbo mortgage rate programs. Thirty year fixed money remains higher as investors don't have the appetite to lend large balance loans on a fixed basis in this environment. Investors believe rates should and could be higher in the future so they are offering ARMs. Many banks don't offer any 30Y fixed as a result of the interest rate risk.

The short-term rate-cut the Federal Reserve was expected to announce Wednesday would not have any direct effect on long-term jumbo mortgage rates, although it will affect rates for things like home equity lines of credit and consumer credit cards. Nonetheless, news about Fed actions often prompts homeowners to take action. This is especially important if home values have been soft or falling in your area as equity is more important in a refinance than FICO score for most large balance scenarios.

If Congress makes that change, possibly by mid-February, banks and investors will be inundated with refi business, we have seen a dramatic increase in applications since the Bush gave his economic stimulus speech two weeks ago and the stock market tanked following MLK Jr day. There is a window that's going to be there; we don't know how long it's going to be there and are advising clients to lock at these levels. Don't get greedy by holding out for a rate that may never come as falling values create a situation where clients rates are substantially driven by their lack of equity. Get a package in place right now. I would not wait. Good candidates for refinancing: having equity in your home.

With property values declining in so many markets, the main thing to look for is whether the equity is there. Those who have at least 20 percent equity in their home - that is, their loan balances are equal to 80 percent or less of their home's market value - will have the easiest time refinancing. In areas that some lenders have designated as "soft" or "declining" markets, where home values are sliding, borrowers must have even higher levels of equity before lenders will approve a loan.

Also factoring into the "to refi or not to refi" conundrum this time around is whether borrowers measure up to the newly tightened underwriting guidelines. The most competitive rates are available to those customers with credit scores of 720 and substantial verified assets in bank/brokerage accounts. Borrowers these days also need to be prepared to provide proof of their income and assets, and sometimes tax returns.

Refinancing might not be advisable - or possible - for homeowners with impaired credit, or those who can't provide documentation of their income, or who have little equity and live in what can be determined as a declining market. It is far better to know your choices now than to procrastinate and find out that recent home prices and lending guidelines prevent you from refinancing your jumbo mortgage. Look for the Senate to vote and Bush to signoff by mid Feb.