SANTA CRUZ (February 14, 2009) - Traditionally, the conforming loan limit has been set each year by Freddie Mac and Fannie Mae, the nation’s largest investors in home loans. This is the maximum loan amount that Freddie and Fannie will buy from banks and mortgage companies. Because Freddie and Fannie have historically had the implicit backing of the U.S. Government, the mortgage rates for loan amounts up to the conforming limit have been the lowest available. The underwriting guidelines established for this category of loans by Freddie and Fannie have set the standard in the mortgage industry.

Loans larger than the conforming limits, referred to as jumbo loans, have always had higher interest rates and tougher underwriting standards and, consequently have always been harder to qualify for than for loans under the conforming limit.

Those of us in the mortgage industry were so excited when President Bush signed the first version of the economic stimulus package one year ago this month. It was going to raise the conforming loan amount to $729,750 for high priced areas like Santa Cruz County. That should have meant that rates would drop and underwriting guidelines would ease for loan amounts above $417,000, which has been the conforming loan amount for single family homes since January, 2006. The conforming loan amount for duplexes, tri-plexes and four plexes is higher.

Unfortunately, that was not to be. In response to the President’s mandate, Freddie Mac and Fannie Mae established another tier of conforming loans, referred to as “agency jumbo’. Agency is in reference to Fannie and Freddie and the jumbo is in reference to the fact that this new category was for loan amounts above the traditional conforming rate and under the President’s new limit of $729,750.

The upper limit that the President established for Freddie and Fannie one year ago expired on 12/31/08 and the new limit for 2009 dropped to $625,500. While Freddie and Fannie are buying loans in this new category of loans between the $417,000 and $625,500, their underwriting standards are much stricter and the interest rates are considerably higher than for loan amounts under the $417,000. This makes it much harder to qualify and less desirable for homebuyers to seek loan amounts above $417,000. One explanation is that Freddie and Fannie are allowing no more than 10 percent of their loans to fall within the agency jumbo category. It is both interesting and frustrating to note that two states, Alaska and Hawaii, have been designated as super high priced areas and, consequently, enjoy the better rates and easier underwriting for loans all the way up to $625,500.

Refinancing homeowners with larger loans in this category seeking the best rates and who are able should either consider buying down their loan amounts to $417,000 or be willing to pay more in loan origination fee. This period of low rates may be the last time this generation can reach or drop their 30 year fixed rates below 5 percent. Those borrowers who need loans above the current $625,500 agency jumbo will pay still higher rates and must suffer through stricter underwriting guidelines.

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.