For millions of homeowners, the
bursting of the housing bubble
seems like a never-ending nightmare. But in just another month, a
new chapter of that saga may begin for homeowners and potential
buyers in high-priced real estate markets.
The latest bad news for housing comes from the federal
government, which is reducing the size of mortgage loans that are
eligible for government guarantees. Although everyone knew the move
would come eventually, hopes that the market would already have
recovered by the time limits moved back down have proven overly
Make it a jumbo
In 2008, Congress temporarily
raised the upper limit
on government-backed loans to $729,750. That allowed
, and the Federal Housing Administration to cover homes in many
high-priced areas where the former limits were inadequate.
But on Oct. 1, the limit will drop back to $625,500. If you live
in an average real estate market, that may not sound like a huge
hardship, as it may cover only the most expensive homes in your
area. But in the highest-cost areas of the country, that limit
isn't nearly as extravagant as it sounds -- and the move will force
many would-be homebuyers to turn to the
more expensive jumbo mortgage market
to get financing. And with many banks taking 30 days to process and
fund new mortgages, that effectively means that time has just about
run out to take advantage of the higher limits.
Harder to buy
What makes jumbo treatment so bad? During the financial crisis, the
market for jumbo financing came to a standstill as
lenders wanted the security of federal
. Since then, lenders such as
) have gone back to embracing the jumbo market. According to
Bank of America
) are now the largest jumbo loan producers, with JPMorgan and Citi
also having a major role.
Moreover, even rock-bottom rates on mortgages haven't broken the
logjam in housing. Mortgage applications fell to a 15-year low last
week, as fears about the economy and high unemployment rates made
potential buyers less confident about their ability to handle
big-ticket purchases. Adding another hurdle by throwing more buyers
into jumbo status certainly won't solve any problems.
Finally, jumbo loans tend to cost more than regular mortgages.
An extra half or full percentage point may not seem like a big
deal, but over the course of 30 years on a huge principal balance,
the difference can add up to tens of thousands of dollars in extra
Less danger of illiquidity
Things don't look as bad as they did three years ago, though.
That's largely because once-shunned mortgage securities are now
among the hottest investments -- not as direct investments, but
rather through mortgage REITs.
Investor interest in mortgage real estate investment trusts has
never been higher. Given the huge yields that mREITs pay, that's
not surprising -- but it does mean that mREITs need a steady supply
of mortgage-backed securities.
The move in jumbo mortgages could result in a shift, though.
Since government agencies can't guarantee jumbo loans, mREITs such
American Capital Agency
(Nasdaq: AGNC) that focus primarily on agency-backed securities
will lose some supply. That in turn will expand what's available to
other mREITs like
(CIM) , which goes beyond agency securities in search of better
What's crucial, though, is that mortgages continue to flow
through the system. If the lowering of the jumbo threshold
restricts that flow, then even the support from mortgage REITs
won't necessarily be enough to offset the problems the lower limits
As tough as the housing market has been in the past several years,
it seems like new obstacles keep coming up. With the new lower
jumbo-loan limits approaching, it may be a matter of time before
some broad new initiative attempts to tackle the fundamental
question of making today's low mortgage rates available to anyone
who wants to refinance. Until that happens, homeowners may have to
keep waiting for a home-price recovery.
Whether you're buying, selling, or just looking for a better
deal on your mortgage, check out the Fool's Home Center and get the
information you need today.
Tune in every Monday and Wednesday for Dan's columns on
retirement, investing, and personal finance. You can follow him
on Twitter here.
is happy his house is in one piece after Irene. He owns shares
of Chimera. The Motley Fool owns shares of Citigroup, Chimera
Investment, Annaly Capital Management, JPMorgan Chase, Wells Fargo,
and Bank of America, as well as a ratio put spread position on
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