As part of the new economic stimulus package being pushed through the House, the loan limits for Fannie Mae and Freddie Mac are set to be raised substantially in certain areas across the U.S. The new limit--anywhere from $625,500 to $730,000, depending on how the finalized legislation turns out--would be set for one year, according to The Wall Street Journal.
Fannie Mae and Freddie Mac are government-sponsored mortgage buyers, the two largest such companies in the world. These new limits are likely to have a positive impact on the mortgage markets in the affected high-cost areas because they could enable many people in these areas to qualify for conforming loans. The difference between the pricing on a conforming loan and a jumbo loan (loans with values in excess of conforming limits) it is typically substantial.
Furthermore, in today’s mortgage environment, banks are becoming less and less willing to even do jumbo loans: They are considered risky, and risky loans are being avoided like the plague by many investors and subsequently by banks. The previous conforming limit of $417,000 is simply a joke in places such as San Francisco. A single-family home in the San Francisco-Oakland-Fremont metro area has a median price of $825,400, according to the National Association of Realtors.. While these new limits could very well help stimulate some of these high-cost stagnant, or even declining, real estate markets, it is no guarantee that it will end up helping significantly.
For the people who can now qualify for conforming loans, they will probably save money on their mortgage. In addition, some people who couldn’t otherwise qualify for a mortgage will now able to do so. Any time buyers can get more house for their money, the potential number of buyers is increased, which tends to reflect positively on real estate prices. Thus there is certainly potential for good things to happen in those markets. However, we must also remember that many of these high-cost markets have bigger problems that won’t be cured simply by raising these limits, especially considering the country's overall economic situation. While this news can only be seen as good thing for these high-cost markets, people in these markets shouldn’t get their hopes up for a dramatic turn around simply because of it.