HUD boosts O.C. loan limit 75%

Larger loans may soon become cheaper and easier to get in Orange County, giving its struggling housing market a boost.

Government sponsored loan buyers such as Fannie Maeand Freddie Mac can now buy loans up to the new conforming limit of $729,750, a 75 percent increase from the old limit of $417,000, said the Department of Housing and Urban Development on Thursday. HUD announced the new limit Wednesday, one day after saying the Federal Housing Administration can now insure loans up to $729,750 in the county.

For consumers, the limit increases are good from now until the end of the year, when they revert to $417,000 or $362,790 for FHA. The stimulus package signed by President Bush last month actually is retroactive to July 2007, but that does not mean anyone who got a loan since then will suddenly get a rebate. It means banks holding loans can now sell them to Fannie or Freddie.

Here are some questions and answers about what the large spikes in the conforming and FHA loan limits mean for the county's homeowners and home shoppers.

Q.  When will Fannie and Freddie, the largest U.S. funders of home loans, start buying mortgages up to $729,750?

A.Fannie said it will start buying larger fixed-rate mortgages on April 1 and larger adjustable-rate loans on May 1. Brad German, a spokesman for Freddie, said the company has not yet set a date but hopes to start buying loans by the second quarter of this year.

Q.Will mortgage rates fall on loans above the old limit of $417,000 and up to the new limit of $729,750?

A.Maybe. Rates on jumbo loans, which are above the conforming limit, have generally been a percentage point higher than conforming rates since the credit crunch hit in August 2007.

Traders in mortgage-backed securities say larger loans are more likely to be refinanced when interest rates fall, so they don't want to see larger loans mixed in with loans up to $417,000. German said loans above $417,000 will be separately turned into securities and sold to investors. Some experts say such separate treatment could mitigate the benefit of having Freddie or Fannie back the loans and so interest rates to consumers might not fall by very much.

And brokers say rates are up on conforming loans these days, despite a recent drop in yields on long-term government bonds. That's because investors are worried about all mortgage-backed securities – even those with the seal of approval from Fannie or Freddie.

"Mortgage-backed securities are just not a safe investment right now," said Jeff Altman, a broker and partner of WestCal Mortgage Corp.in Orange.

Q.But this change should make larger loans easier to get, right?

A.Yes and no. Fannie and Freddie will not only buy new loans but will buy loans currently on the books of many lenders. That should free lenders up to make more loans.

However, Fannie has already issued requirements to qualify for the larger loans, and some are tougher than before. For example, borrowers must document their income and assets, and anyone seeking a large adjustable-rate purchase loan must put down 20 percent of the value of a property. Freddie Mac should issue guidelines soon.

Q.So will all this boost Orange County's sluggish housing market?

A. Raphael Bostic, a real estate professor at USC, said it is definitely good for the county, but, "I'm not sure it's a savior for the housing market." He said that the increase in the FHA limit will help people with poor credit – previously served by subprime lenders – get loans. "I actually think the cheaper rate is not the issue, it's any rate," Bostic said.