As part of the $150 billion economic stimulus package Congress and the Bush Administration have agreed to raise the conforming loan limit. Congress has already passed the bill and President Bush is expected to sign it this Wednesday. This increase in the limit is only temporary until December 31st, 2008.
The new conforming loan limit allows Fannie, Freddie and FHA to purchase loans up to 125 percent of the median home price of an area. The HUD is charged with the task of determining the median price for an area. The HUD has 30 days (from the time of singing) to publish the median-home-price data. It is unclear at this point how the HUD plans to define the area. Zip code? Metro area? Etc.
It’s important to understand that while the loan limit is calculated at 125% of the median home price, the loan limit is capped at $729,750. For example in Fairfax, CA where the median home price was $672,000 in January 2008, 125% of the meidan home price would be $850,000. This is greater than the cap. So, the conforming loan limit would be $729,750.
The main effect of the increased loan amount is it reduces jumbo interest rates pretty substaintially. Consequently the reduction in monthly payment can be pretty substantial for such high loan amounts. For example the Arizona Republic reported that the average 30 year fixed was at 5.74% last Tuesday while the jumbo averaged 6.86% on the same day. At the lower rate a the monthly payment is better by $365 on a $500,000 mortgage.
I do admit this is a bit of a oversimplification. I would imagine that Freddie, Fannie and FHA will have a add-on of 0.25-0.50% for loans higher than 417,001 and the areas conforming loan limit. This will still make the rates better than in the past, but not as attractive as my example above.
Now will this stimulate the economy? Don’t know.