SANTA CRUZ (March 23, 2008) - Nationwide, borrowers can thank the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, more affectionately  known as Fannie Mae and Freddie Mac respectively, for keeping interest rates for home mortgages as low as possible. Fannie Mae and Freddie Mac are the nation’s largest investors in home loans and set the standards for mortgage rates for the 15 and 30 year fixed rate loans.

Every year in late November Fannie Mae and Freddie Mac announce the new ‘conforming’ limits, which is the maximum loan amount that they agree to provide to home buyers for the purchase and refinance of residential properties (1-4 units) for the coming year.

Prior to the signing of Congress’ Economic Stimulus package, the conforming limit for 2008 was $417,000. For loan amounts at that level or under, mortgage rates are lower (by 1-2 percent) and underwriting guidelines were more lenient than for loan amounts over $417,000.

Based on our area’s median home price, the stimulus package bumps the conforming limits up to $729,750 in Santa Cruz County. We were all hopeful that these new limits would open up the opportunity for homeowners to refinance into lower rates and consolidate their first and second mortgages.

However, what we discovered was this new category of loans between $417,000 and $729,750, called ‘jumbo conforming’ loans will not be receiving the same treatments as the traditional conforming loans. While it is still not clear where rates will settle in at for these loans in the jumbo conforming category, it has been made clear that they will not be as low as those rates for loans under $417,000, which this week have been near 5.5 percent for 30 year fixed rates; nor will they be as high as the jumbo loans, which have been running as high as 7 - 7.5 percent.

Fannie and Freddie have issued guidelines far more restrictive for this new category of loans than for the loans under $417,000. For example, some investors won’t allow cash-out on refinances or loans on condos and reserves will be required on all loans. Debt to income ratios will be restricted to 45 percent whereas those ratios can go as high as 65 percent for loans under $417,000. When cash out is allowed, it will be limited to $100,000 and vacation homes and investment properties will require 40 percent down! To top it off, this new category of jumbo conforming is pre-scheduled to ‘sunset’ on December 31 of this year. We are hoping that Congress will extend it.

No doubt, the lending industry has tightened and the banks are more risk-adverse than ever. It is quite the opposite from the mortgage industry just one or two years ago. Wall Street investors are jittery and no longer consider mortgage-backed securities the Cinderella of investment vehicles.

That leaves borrowers with fewer choices, higher rates and stricter guidelines. While the new jumbo conforming loans will help certain borrowers, they will not help the masses as we had once thought. Remember though, while rates for jumbo and jumbo conforming loans seem high today, they are not and borrowers with good credit and solid income are able to obtain excellent financing.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.