It sounds like another round of bad news for the mortgage industry. The government has made it clear that no one is constitutionally entitled to a government-backed mortgage of up to $729,750, no matter where you live. Even in places where the cost of buying a house is far above the national average.
The recession has been tough on the jumbo mortgage loan market, loans for homes that are over $417,000. Investors stopped buying jumbo loans and the jumbo mortgage market virtually shut down overnight.
Homeowners who wanted to refinance to take advantage of historic low interest rates found they simply couldn’t get anyone to give them a loan, particularly since home values were falling. Buyers purchasing high-cost homes found they had to put down as much as 30 or 40 percent in order to land financing.
In a dozen high-cost areas, the government stepped in to back jumbo loans to $729,500 in places like Manhattan, San Francisco, and other high-cost areas. That helped bring down the cost of financing large loans for consumers. What many Realtors and mortgage lenders didn’t understand is that the measure was temporary. Last year, it was given a one-year extension.
Now, the message is clear: If you want a jumbo loan, you’ll have to get one from the private mortgage market. While the government will still back mortgages in high-cost areas, the magic number seems likely to drop to $625,500.
And, that means jumbo mortgages are going to be far more costly – if you can get them at all.
It shouldn’t surprise anyone that the National Association of Realtors is up in arms. The Realtors are convinced that home values will drop in those areas once government-backed financing dries up. The Mortgage Bankers Association has also joined the fight, expecting that fewer home buyers will be able to get the financing they need to close.
Will cutting back government financing hurt the housing industry? Maybe. The real problem is that the housing industry is still on life support, with the federal government supplying the dopamine.
Fannie Mae and Freddie Mac, the secondary mortgage market leaders have been in conservatorship (basically, a special form of bankruptcy) for months. Together with FHA, these three entities are backing more than 90 percent of all mortgages. Fannie Mae, which just asked for another $6.5 billion to make up for mortgage losses, and Freddie Mac have cost taxpayers hundreds of billions of dollars.
Realtors say that home buying is anemic. Pending sales of existing homes have been up and down over the past few months. New home sales have been virtually nonexistent. This is the first spring real estate market since 2007 without a home buyer tax credit and while activity has picked up in some markets, home prices are still falling.
What the housing industry really needs is a country where jobs are being created and its citizens are going back to work. If you have a job, you can afford to buy a home and get a mortgage. It’s far bigger bang for the buck than backing mortgages worth nearly a million dollars.