Prospective home buyers and sellers could run into additional roadblocks in coming months as new mortgage regulations set to take effect this fall filter into the system. Although the new limits on conforming loans—mortgages eligible for government guarantees—won't officially roll out until October 1, buyers and sellers alike could feel the pinch of even tighter credit availability much sooner as lenders start gearing up for lower loan caps.
"As these regulations are rolled out, every individual lender takes a different amount of time to implement and get the changes into the pipeline," says Mona Marimow, senior vice president at LendingTree.com. "Many lenders might start implementing and affecting their rates prior to the October 1 rollout."
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To shore up a faltering housing market, Congress increased the maximum loan amount that government-sponsored enterprises Fannie Mae and Freddie Mac could guarantee, to a high of $729,750 in some markets. That made it easier for borrowers in pricier markets to get loans because lenders and investors were guaranteed to receive payment regardless of whether the homeowner defaulted.
Now, as the government begins to gradually reduce its footprint in the housing market, limits on government-backed loans are scheduled to reset to prior levels—a high of $625,500 in some markets—which experts say could ultimately lead to higher mortgage rates and more downward pressure on home prices.
The brunt of the impact will fall on middle-of-the-market buyers and sellers in pricier housing markets, says Paul Bishop who heads up research at the National Association of Realtors. "The biggest change could potentially happen in higher-cost areas, because for a number of buyers in higher-cost areas [such as] New York, Washington, Los Angeles, a home that would require a mortgage above $625,000 is not an unusual purchase," Bishop says. "It's really going be a hit for those buyers in those areas right at the middle of the market, and what we've seen over the last several months is that the middle segment of the market have really been the weakest."
Prospective borrowers could face higher mortgage interest rates for loans that exceed the new caps—also called jumbo loans—which would increase the overall cost of owning a home. That, in turn, would likely discourage the house hunters the economy desperately needs to jump-start the housing market. "It's a concern for home buyers thinking about whether they want to move forward in an economic environment where there's one more type of uncertainty in the decision making process," Bishop adds.
House hunters might also be drawn to less-expensive properties as a result of the change, which could exacerbate existing weakness in the middle-priced segment of the market. "When you consider the new jumbo rate plus you have to put a greater amount down, it's going to have implications for consumers who are probably going to decide to take a home with a lesser value," Marimow says.
But buyers aren't the only ones who will feel the ripple effects of a drop in conforming loan limits. Sellers, too, are likely to feel the impact, especially if their asking price is above the new limits. "If home sellers want to make their sale attractive to potential buyers, then there may be some downward pressure, such that it's more likely that the buyer walking in the door would be able to get a conforming loan at the new level," Bishop says. That means that if normally a house might sell for $750,000, for example, the seller might find it in their best interest to push down the price to accommodate buyers seeking mortgages under the new limits.
That's not good news for the housing market or the U.S. economy, neither of which can afford fresh obstacles to recovery. "At this point, the timing in reduction of any loan limits is probably not good in any real way, simply because the housing market is struggling," Bishop says. "In terms of the big picture, it's still fragile, but we would like to see that move forward because history shows the rest of the economy really doesn't recover in any meaningful or robust way unless the housing market is also on stable footing."
Nevertheless, consumers can start preparing for the shift now, ahead of the October 1 transition. "The good news is that there is information being shared about this now," Marimow says. "This is the right time to be talking about it because once the changes do take effect, the people who are affected will already not have other options."
The best thing consumers can do now is evaluate their needs and do their research, especially in an environment as frenetic as this one. "Consumers should look for a closing guarantee and lenders that are going to be able to lock in your rate as quickly as possible, because your rate could float even over the time [it takes] to close your loan," Marimow says. "You truly need to shop around as much as you can to make sure you're comparing and contrasting to know you're getting the best one."