SANTA CRUZ (November 30,2008) - The mortgage professionals on the front lines, those of us meeting with prospective homebuyers and originating mortgages, are greeting the details of the 2009 conforming limits with a mixed blessing. The ones making the rules had an opportunity to provide some much needed relief for refinancing homeowners and homebuyers when determining the guidelines for mortgage lending in 2009. They fell short.

Historically, Fannie Mae and Freddie Mac, the nation’s largest investors in home loans, announce each November the maximum loan amount that they will accept. This limit is called the conforming limit and is traditionally based on the median price of a home, nationwide. We can thank Freddie and Fannie for historically offering the lowest 15 and 30 year fixed rate mortgages throughout the United States. Loans above the conforming limit are called jumbos and are placed by other investors, charge higher rates and have stricter underwriting guidelines.

The conforming limit typically increases each year as home values have increased. For example, the conforming limit was $359,650 in 2005 and then went up to $417,000 in 2006, where it has remained. Fortunately, that limit has not been decreased in the current economic downturn.

In February the President signed the 2008 Economic Stimulus Package in an attempt to help out our struggling economy. One much anticipated feature of this bill was that the conforming limit and the FHA maximum loan amount were both raised to $729,750 but only for the rest of 2008. With lower rates and more lenient guidelines, this new limit would have made it possible for more families to qualify for a refinance or a purchase transaction, which, in turn, would have really provided a shot in the arm for the real estate markets, especially in high priced states like California and New York.

Unfortunately things did not unfold that way. Sure, loan amounts up to $729,750 were called conforming but the rates were still higher and the guidelines were much stricter for loan amounts between $417,000 and $729,750.

Now we have the new year approaching and Freddie and Fannie have just announced that the conforming limit for 2009 is going to drop to $625,500. We all thought that we would be thrilled if the conforming limit was really going to be increased from $417,000 to $625,500. After all, Hawaii and Alaska (judged to be higher priced states for housing?) have truly been enjoying the lower rates and easier underwriting for loan amounts up to $625,500 since 2006! The maximum FHA loan will also drop to $625,500 from its current $729,750.

While we were disappointed to discover that the true conforming limit is going to remain at $417,000 and that loan amounts between $417,000 and $625,500 were going to carry higher rates and much stricter guidelines, we are thrilled with the benefits that FHA has to offer for our homebuyers in Santa Cruz County!

Stay tuned to see if Freddie and Fannie will be further tightening their underwriting guidelines. There have been rumors that they will not allow a borrower’s debt-to-income ratio (DTI) to exceed 45 percent, even for loan amounts under $417,000. That change would drive even more business to FHA loans, where DTIs up to 55 percent are allowed. Freddie and Fannie have been allowing DTIs up to 60 percent for loan amounts under $417,000.

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.