(Source: Record, The; Bergen County, N.J. By KATHLEEN LYNN ) - Buyers of certain high-end homes will face higher mortgage rates and heftier down payment requirements starting Oct. 1, when the federal government takes a small step back from the mortgage market.Fannie Mae, Freddie Mac and the Federal Housing Administration currently buy and guarantee mortgages of up to $729,750. That government support allows borrowers to put down as little as 3.5 percent and enjoy lower interest rates.
But as of October, the government is going to stop backing loans of more than $625,500. Loans that exceed that limit will be considered “jumbo” loans, which typically carry higher interest rates and require 20 percent (or higher) down payments.
Under the new loan limits, the buyer of a $750,000 home will have to come up with a down payment of $150,000, much more than would typically be required with a government-backed loan. That may cut down on the number of buyers in that slice of the market.
“If they want to buy something that’s $750,000 and all they have is 10 percent to put down, they’re not buying that house,” said Carl Nielsen of Mortgage Masters, a mortgage broker in Wayne.
The lower limit is likely to put pressure on home prices, said Robert Wilderotter, a mortgage broker with Real Estate Mortgage Network in River Edge.
“If the change creates a falloff in demand or lack of affordability, it’s certainly possible you could see a falloff in home prices,” agreed Keith Gumbinger of HSH.com, a mortgage information company in the Pompton Plains section of Pequannock. But he predicted that the drop would be minor.
Marvin Anhalt of Anhalt Realty in Englewood also expects only minor effects because most buyers in the $700,000 price range can afford to put down 20 percent or more.
“They’re not first-time buyers,” he said.
Nielsen said that in his experience, most buyers in higher price ranges do not choose FHA loans. Although those mortgages have the lowest minimum down payment — 3.5 percent — they also carry higher fees. As a result, many buyers put down at least 10 percent, for loans backed by Fannie Mae and Freddie Mac. The higher down payment requirements would hit those buyers.
A spokesman for Freddie Mac said that its minimum down payment is 5 percent, but on average, buyers put down 30 percent.
The down payment isn’t the only difference between government- backed and jumbo loans. Interest rates are higher on jumbos — recently about a third of a percentage point higher. Mortgages between $417,000 and $729,500 recently carried an interest rate of about 4.7 percent, compared with 5.06 percent for jumbo mortgages above $729,500, according to HSH. That’s still quite low by historic standards.
“No one is going to welcome an increase in the cost, but it’s only a minor increase, and probably isn’t a substantial deterrent to buying a home,” Gumbinger said.
Fannie Mae, Freddie Mac and the Federal Housing Administration once backed mortgages only up to $417,000. But after the financial meltdown of 2008, the limit was temporarily bumped up to $729,750 in the nation’s most expensive housing markets, including North Jersey.
The Oct. 1 drop to a limit of $625,500 was opposed by the National Association of Realtors and the National Association of Home Builders. The NAHB said a recent study by its economists found that the change in the loan limits “will reduce housing demand and place downward pressure on home prices.”
The NAHB estimates that the new loan limits could potentially affect about 5.3 million owner-occupied homes nationwide, including about 46,000 (about one in five) in Bergen and 10,000 (about one in nine) in Passaic. But only homes actually put on the market would be affected, a small fraction of the total number.
But the government is trying to edge out of the mortgage market. It currently backs more than nine of 10 mortgages made in the U.S., because the private market for mortgage-backed bonds has all but disappeared since the financial crisis.
“There isn’t really an active secondary market where loans can be sold, aside from the government,” Gumbinger said. The government’s decision to cut the loan limits may allow private money to come back in and boost the mortgage market’s recovery, he said.
“It’s a necessary step, and it’s a small step,” he said. “These are very desirable borrowers who usually have very good credit. It’s likely that as the government pulls back, private lenders are going to step in.”
Federal Reserve Chairman Ben Bernanke agrees. He recently told a congressional hearing that private lenders are expected to take on a significant percentage of the jumbo market, though at a higher cost to borrowers.
Hudson City Savings Bank, based in Paramus, is one lender that sees opportunity in this market.
“We’re very happy the limit is going back to $625,500,” said Thomas Laird, chief lending officer at Hudson City.
Hudson City keeps its mortgages in its portfolio, rather than selling them to investors in the secondary market. When the government raised the limit on loans it would buy to $729,750, “that had an adverse effect on us,” because borrowers in that price range could qualify for government-backed loans, Laird said.
Hudson City requires a down payment of at least 20 percent on jumbo loans, Laird said. Other banks require more. Wayne-based Valley National, for example, requires 25 percent down, according to Al Engel, executive vice president.
He said the new loan limits won’t affect Valley National’s lending practices, because it already requires 25 percent down on loans over $417,000.
Since the federally backed mortgages are supported by taxpayers, Laird argued that it’s appropriate to limit their size.
The government backing, he said, is meant to add liquidity to the mortgage market for low- and middle-income borrowers, and “a $729,750 mortgage is certainly not for a low- or moderate-income household.”
Source: Record, The; Bergen County, N.J. By KATHLEEN LYNN
(c) 2011 Record, The; Bergen County, N.J.. Provided by ProQuest LLC. All rights Reserved.
A service of YellowBrix, Inc. Publication date: 2011-07-31
