High Balance Loan Limits Set to Expire at the End of the Month

If are looking to purchase a home or refinance a mortgage in certain high cost areas of the country, the interest rates that you will have to pay on your mortgage may soon increase because lower conforming jumbo loan limits are going to take effect after September 30th.

In order to theoretically limit risk, there is a statutory cap on the size of a mortgage can Fannie Mae, Freddie Mac, or the FHA can purchase.  This cap is known as the conforming loan limit, and is set at $417,000 in most areas of the country.  In some high cost areas (high cost areas are defined as those where the median home price exceeds the conforming loan limit), the limit is higher, as much as $729,750 depending upon the median home price.  Mortgages that fall in between $417,000 and the upper limit in the high cost areas are known as high balance conforming or high balance jumbo loans.

Since high balance loans are eligible for purchase by the GSEs, they feature lower mortgage rates than true jumbo mortgages ($729,750+).  This is because true jumbo mortgages are financed by private investors who demand a higher return on their investment than the government does.

At the height of the financial crisis in 2008, the high balance loan limit was temporarily raised to $729,750 in order to stimulate home sales.  Since that time, the temporary loan limits were extended several times, but are currently set to expire at the end of September.  There had been some talk in Congress of extending the current high balance loan limits, but as of now it does not appear that will happen.

Although the expiration will hurt a relatively small number of homeowners (nearly 80% of high balance conforming loans come out of California, New York, New Jersey, and Massachusetts), it couldn’t come at a worse time for the housing market, which is pretty much on life support as it is.  The saleability of homes in this price range could be significantly impacted, and these high cost markets could suffer as a result.

It is certainly possible that Congress votes to keep the current loan limits, although it doesn’t seem particularly likely.  Allowing jumbo loan limits to drop allows politicians to show that they are trying to curtail government involvement in the housing finance sector without changing something that would impact a lot of borrowers (such as taking real steps toward winding down Fannie and Freddie – which I don’t think would be prudent at this time).

We shall see what happens.