RESIDENTIAL REAL ESTATE
New mortgage programs kicking in
HIGHER-LIMIT FHA LOAN ALLOWS 3 PERCENT DOWN; JUMBO RATES INCH DOWN
Monday, March 31, 2008
BY WILLIAM JASON
STAFF REPORTER
NORTH BAY – In mid-February, Congress and President Bush raised the caps on federally backed mortgages, hoping to provide relief to high-priced housing markets such as the North Bay.
More than six weeks later, the rates for higher-dollar mortgages have fallen, although not as far as some would like to see. The good news, according to local lenders, is that larger loans are becoming easier to get through a long-overlooked mortgage program sponsored by the Federal Housing Authority. “We’re having a lot of demand for FHA loans,” said Otilia Sullivan, a loan officer with Princeton Capital in Santa Rosa.
Until recently, larger mortgages cost only slightly more than smaller ones. But the rates for so-called jumbo loans have soared during the mortgage crisis as investors have flocked to mortgages backed by Fannie Mae and Freddie Mac, government-sponsored corporations that purchase loans on the secondary market. Those loans, known as conforming loans, had been capped at $417,000.
As part of the recent economic stimulus package, Washington temporarily raised the conforming loan limits in high-cost markets, changing it until Dec. 31 to $662,500 in Sonoma County and $729,750 in Napa and Marin counties.
Since early March, a limited number of lenders have been originating the new, high-balance conforming loans, but rates for those mortgages remain well above those for traditional, conforming loans.
“It is better than the jumbos, but it’s still not anything close to the traditional conforming loan,” said Michael Madsen, a partner in the Madsen-Shaw Group at Wells Fargo Home Mortgage in Santa Rosa, which has already rolled out the new loans.
According to Mr. Madsen, the interest rate for new, larger conforming loans was 6.4 percent at Wells Fargo last week, below the 7.25 percent rate for standard jumbo loans but above the 5.6 percent rate for conforming loans below $417,000.
FHA loan 3% down, 6.25% rate
In what could be a more important move for the North Bay housing market, the stimulus package also temporarily raised the limits for a separate type of government-sponsored loan – previously capped at $362,790 – that is guaranteed by the FHA. The new, higher-limit FHA loans, which now have the same cap as the other government-backed mortgages, had an interest rate of 6.25 percent at Wells Fargo last week, according to Mr. Madsen.
More important than the rate, lenders say, FHA can be used to finance up to 97 percent of a home’s value, compared with a maximum 90 percent for the other high-dollar government loans. For a $600,000 house, that translates to an $18,000 down payment with FHA instead of a $60,000 payment through the other programs. “The FHA stuff will be a bigger benefit than the conforming loan limit increases” for Fannie Mae and Freddie Mac, Mr. Madsen said.
During the housing boom it was common for lenders to offer 100 percent financing, but the new FHA loans are attractive because banks have increased their down payment requirements for most loans since the start of the mortgage crisis. In addition, down payment requirements for borrowers in distressed housing markets have increased.
“Since Sonoma County is considered a declining market, most investors require a 5 percent reduction in the maximum loan-to-value,” Ms. Sullivan said.
FHA loans have the same 97 percent loan-to-value regardless of the market, a policy that especially helps California borrowers. “Some lenders have labeled the entire state of California a distressed market,” Mr. Madsen said.
Despite the benefits of the FHA program, some local mortgage lenders have expressed disappointment that the stimulus package has not done more to narrow the interest-rate gap between conforming loans and higher-limit loans, which remained about 80 basis points last week.
“So far, the pricing I’ve seen has just been atrocious,” said Bhodi Krauss, a vice president with Priority Lending Mortgage Corp. in Santa Rosa. “We were really hoping that this would be a boost.”
However, it is possible that the gap will narrow further as the new high-limit government loans start trading on the secondary market, a process that starts in April.
“Maybe once the mortgage-backed securities are being traded, we’ll see some improvement on the pricing,” Ms. Sullivan said.
Greg McBride, a senior financial analyst for the banking data company Bankrate.com, predicted that interest rates for higher-limit loans may drop slightly but will retain a significant premium over smaller mortgages.
“Part of the risk is that they’re likely to be repaid sooner,” Mr. McBride said of larger loans. “Higher loan amounts tend to be refinanced with greater frequency than smaller loans.”
