Jumbo Help

New Rule Could Mean Rate Relief on Big Loans

Anna Galloway keeps a watchful eye on interest rates and stays in touch with her mortgage broker because she is eager to refinance the "jumbo" loan on her Charles County home.

"But I haven't even bothered to try to refinance yet because I know the jumbo rates are too high right now," said Galloway, 37, a D.C. legal secretary. "I'm just waiting and watching for any sign that the interest rates will drop."

That drop may be coming soon.

The economic stimulus package that President Bush signed this week includes provisions aimed at pulling those rates down and reinvigorating a part of the mortgage market still stunned by problems with subprime borrowers that surfaced last year.

Jumbo mortgages -- those that exceed $417,000 -- got expensive as the credit crisis worsened. Rattled investors stopped buying them. Lenders responded by raising rates. And plenty of people in high-cost areas such as Washington got shut out of the housing market or, like Galloway, lost their chance to refinance into cheaper loans.

As part of the stimulus package, the mortgage giants Fannie Mae and Freddie Mac will be allowed to buy or guarantee mortgages up to $729,750 for single-family homes. That's up from the previous $417,000 cap, which was tied to the average home price nationwide. The amount would vary so that the most expensive areas would qualify for bigger loans. The stimulus package also increases the limits for loans insured by the Federal Housing Administration.

The idea is that investor appetite for these larger loans will grow if they have backing from Fannie Mae and Freddie Mac. The two companies are federally chartered, which means many investors treat their loans as if they have the government's implicit guarantee. Fannie Mae and Freddie Mac mortgages are about the only ones investors are buying these days, which is why policymakers wanted jumbos added to the mix.

Mortgage industry experts said the change should encourage lenders to lower jumbo rates. But they disagree on how low and on whether the benefits will be widespread enough to bolster the housing and mortgage markets, especially because the higher caps will be in place for a limited period, through the end of this year.

"The most we can say right now is that there will be some opportunity for some borrowers to achieve perhaps some interest-rate relief on their jumbo mortgages," said Keith Gumbinger, a vice president at HSH Associates, a mortgage research firm.

A lot of the details have not yet been determined. Under the new plan, the Fannie Mae and Freddie Mac loan limits will be set to 125 percent of the median home price in every metropolitan statistical area. Within these parameters, the limit cannot drop below $417,000 or exceed $729,750.

The Department of Housing and Urban Development is in charge of calculating the limits; it's expected to tell lenders next month what the limits are in various areas. It will take several more weeks before Fannie Mae and Freddie Mac can begin to purchase the loans; first they must sort through internal logistical and operational issues.

Many analysts expect limits to increase in about 20 metropolitan areas, mostly pricey markets on the East and West coasts. Federal regulators declined to comment on what they expect the loan limit to be in the Washington area, or on what geographic definition of the region they will use.