If you follow the news, chances are you have heard about the president’s economic stimulus package.  This package, together with recent rate cuts, have garnered headlines over the past week.  What does all this mean to you?

Well, the stimulus package will do a few things.  What most people hear about is the tax rebate, $600 for single filers, $1200 for married, and $300 for each dependent child.  That’s nice, and it sounds like taxpayers should see those rebates come early summer.  What does not get a lot of attention in the news, and could potentially be even more important when talking about the real estate market, is the increase in loan limits for federally insured loans and an on loans that Fannie Mae and Freddie Mac can buy.

Currently, the limits on Federal Housing Administration loans, loans federally insured, is $362,790.  The limits on loans that Fannie Mae and Freddie Mac can buy are $417,000.  This is important because, as the mortgage market continues to get hit with huge losses, buyers of mortgage securities on the secondary market have become scarce.  Just like anything else, the mortgage market works in a supply and demand type of manner.  When there is a huge demand for mortgage securities, guidelines can become relaxed, rates can come down, and people looking to borrow can find a loan.  On the other hand, when there is little demand for mortgage securities, standards get much tighter, rates are higher and it can be tough to find a loan.

By increasing these loan limits, it allows lenders to make the larger loans, knowing there will be a market for them.  In addition, it is going to allow borrowers to obtain better rates on larger loan amounts.  Today, a jumbo loan is anything over $417,000.  A 30 year fixed rate mortgage for a $417,000 loan today can be in the 5.5% range.  By comparison, a 30 year fixed mortgage for a jumbo loan, even if that loan is only for $425,000, may be in the 6.5% range.  Additionally, the guidelines for the jumbo loans are much more stringent.  The proposed new limits for Fannie Mae and Freddie Mac are $729,750.  One estimate mentioned that as many as $400 billion in loans could benefit from this increase simply on the ability to qualify for a refinance once the limits are increased.

So an increase in these limits should add some liquidity to the mortgage market, especially those markets where the median home price is above the $417,000 mark.  In a time where many pending sales are cancelled due to the buyer’s inability to secure financing, this could help to stabilize the slipping real estate market.  One item to note is that these guidelines are not permanent, they are in place for a year (although temporary items like this are sometimes difficult to rescind after a year).  Also, the package has not passed as of yet, but it is in the works, and I would have a hard time believing it does not come to fruition considering the existing conditions.  Keep tabs on the news, if you are currently in a jumbo loan, it could bring about a great opportunity to refinance into a much better loan with a lower rate.  Additionally, if you are shopping for a home now, you could have additional options for a larger loan amount in the near future.

As always, feel free to contact me if you would like to explore your financing options here in California.