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Loan limits and forgetting Fannie Mae
Banks, anxious to keep the real estate boom going, up typical mortgage loan limits.
October 14, 2005: 3:19 PM EDT
By Abigail Bassett, CNN Producer

NEW YORK (CNN/Money) - Banks, looking to squeeze as much as they can out of the real estate boom, are upping loan limits for the typical consumer mortgage ahead of their traditional schedule.

The move is taking place in so-called conforming loans, where banks take their cue on lending terms from Fannie Mae, the federally sponsored mortgage giant. But banks have decided not to wait for Fannie Mae this year.

"A lot of lenders are sending out letters stating that they are going to start accepting loans at higher loan limits well ahead of the Fannie Mae announcement," said Bob Moulton, President of Americana Mortgage in Manhasset, New York. It's a move he says he hasn't seen in his 25 years of business

Conforming loans are loans below a set amount that Fannie Mae will back, making them easier to buy and sell on the secondary market. Any amount above the conforming loan limit is considered a jumbo loan and typically carries an interest rate that is 25 to 50 basis points higher than a conforming loan. This is equivalent to an increase of anywhere from 0.25 percent to 0.5 percent above the rates for conforming loans.

Each year Fannie Mae reviews Federal Housing Finance Board (FHFB) statistics for the period stretching from October to October to determine what changes should be made to the limit. Typically, they will increase the conforming loan limit in relation to the average national home price. According to the National Association of Realtors (NAR), the national median existing-home price for August of this year was $220,000, up from $218,000 in July. The changes in loan limits are announced at the end of November and take effect in January. The current limit has been $359,650 since January of this year.

However, as a result of strong home sales, it seems many lending institutions are jumping ahead of the November announcement. Countrywide Financial (Research) has already increased its conforming loan amount to $400,000, as has lender, Quicken Loans. Bank of America (Research) confirms that it too, has increased its limit but would not give specific numbers. Though Chief Economist at Quicken Loans, Bob Walters, argues that this development is standard, Julie Davis, Spokesperson for Bank of America states, "This is the first time we have pre-empted the January deadline."

Sandy Cutts, a spokesperson at Fannie Mae says that the mortgage backer hasn't tipped its hand, either. "We have not given the banks any indication that this is the level we'll raise the conforming rate to." If the banks' estimates are right and the limit does go to $400,000, it will be an increase of 11 percent.

Walters believes that lending institutions like Quicken Loans, try to estimate what the increase will be, in order to gain a competitive edge. "Lenders seem a bit more aggressive and are taking the loans a bit earlier," Bob Moulton agrees, "It seems as if they are trying to buck for position." According to Senior Financial Analyst, Greg McBride at, "This is one of the many different tactics businesses are using to get in on the hot housing market. Lenders are grappling with what they can do to keep people coming to the market."

By pre-empting Fannie Mae (Research) and Freddie Mac (Research), banks are taking on a small risk while consumers get the benefit. If Fannie Mae does not increase the conforming loan rate to the level that lenders are expecting, the lenders risk having to hold those loans on their balance sheets or having to sell them to the secondary market at a reduced price. "It's a fairly insignificant risk," notes McBride.

Consumers however, stand to get a huge benefit from this move. As a result of the steps banks are taking now, consumers wont have to use a piggyback loan, pay PMI or get into a jumbo product in order to meet the high prices across the country. "You can get a $380,000 loan today, on a conforming first loan rather than having to use a combination of creative financing and high jumbo loan rates to purchase a home. It's a very positive situation from the borrower's perspective."  Top of page

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