SANTA CRUZ (February 3, 2008) - No one knows for sure what affect Congress’ new economic stimulus package will have on the mortgage market because it has not passed the Senate yet. The House version that was passed by an overwhelming margin (385 - 35) included an increase in the maximum loan limit that Freddie Mac and Fannie Mae can provide, as well as an increase in the FHA loan limit, to $729,750 (the current conforming limit is $417,000 for a single family residence or condominium). The President has said that he would sign it as soon as Congress passes it.

Nationwide, borrowers can thank the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, more affectionately  known as Fannie Mae and Freddie Mac respectively, for establishing the conforming limit (the maximum loan they will make)  and keeping interest rates for home mortgages as low as possible. Fannie Mae and Freddie Mac are the nation’s largest investors in home loans and set the standards for mortgage rates for the 15 and 30 year fixed rate loans.

Every year in late November Fannie Mae and Freddie Mac announce the new ‘conforming’ limits, which is the maximum loan amount that they agree to provide to home buyers for the purchase and refinance of residential properties (1-4 units) for the next calendar year. Loans larger than the conforming limit are referred to as "jumbo loans" and are funded by private investors whose rates are typically as much as 1.00 percent higher than the fixed rate conforming loans. Underwriting guidelines are also less stringent on conforming loans.

Regardless of which mortgage company or bank originates a loan, most of the nation’s 15 and 30 year fixed rate loans (within the conforming limits) are sold to Freddie Mac and Fannie Mae because they have the lowest rates.

This huge increase in the loan caps would be an extraordinary move which could provide an unprecedented opportunity for homebuyers and homeowners not only in California but in other states with high priced homes like New York and Florida.

If a homebuyer or refinancing homeowner could save 1 percent on a $600,000 mortgage, the savings would be $500/month, which represents a huge savings! Additionally, the underwriting standards are more lenient for conforming loans. Also, homeowners who had to obtain a second mortgage in order to avoid obtaining a jumbo loan could consolidate both loans into a new conforming loan and eliminate the higher rate on their second mortgage.

Unfortunately, under the proposed legislation it is likely that lenders will not simply offer the current rates on conforming loans (which were hovering around 5.5 - 5.75% last week) to loans above $417,000. Industry insiders are also saying that it may take Fannie Mae and Freddie Mac 3 - 6 months to figure to ‘ramp up’ to accommodate the new loan limits.

Until the President signs on the dotted line (which could be as soon as February 15), we are all in a wait and see mode. Even then, it may take the mortgage industry a while to react and change their guidelines. For now, we are all happy that 30 year fixed rates are remaining under 6 percent for conforming loans.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 or email him at Peter@SantaCruzHomeFinance.com.