| Fannie Mae and Freddie Mac, two housing finance | | | | more than 30-40% of their gross income on housing. |
| companies that have the implicit backing of the United | | | | As such, any drop in rates would yield more buying |
| States government, presently limit the mortgages they | | | | power for each buyer that was taking out a loan. With |
| buy in the lower 48 states to a maximum size of | | | | a lower interest rate, a person can pay more for a |
| $417,000. Alaska and Hawaii loans can be as high as | | | | house yet keep the same monthly payment. Giving |
| $625,500. They also have a number of other | | | | buyers and current homeowners who want to |
| requirements such as documented income, | | | | refinance the access to lower cost capital will serve |
| employment verification, and many others. A loan that | | | | as an offsetting factor to downward price forces such |
| does not meet the strict guidelines is considered to be | | | | as too much supply, higher levels of foreclosures, or |
| non-conforming and is not eligible to be purchased by | | | | home prices that don't reflect local incomes. The |
| Fannie Mae and Freddie Mac. This includes all "jumbo" | | | | markets most affected by an increase in conforming |
| mortgages which are mortgages greater than | | | | mortgages would include: San Diego, San Jose, |
| $417,000. Loans are certainly available for these | | | | Riverside, Orange County, Los Angeles, San Francisco, |
| borrowers, however, it must come from other sources | | | | and Sacramento. |
| of capital such as banks, credit unions, and mortgage | | | | The downside of raising the limits should also be |
| companies that often sell large pools of mortgages to | | | | considered. For one, if you cause the value of real |
| investors. Historically, these loans would require rates | | | | estate to increase based on lower interest rates, you |
| to be perhaps ¼% higher than conforming rates. | | | | make housing less affordable to people like cash |
| However, as investors lost a lot of money investing in | | | | buyers that don't care about obtaining a loan. |
| mortgage backed securities that ended up being of | | | | Additionally, Freddie Mac and Fannie Mae have faced |
| poor quality, they immediately required higher rates of | | | | a number of operational and accounting problems in |
| return on new mortgages. Now, jumbo loans are | | | | recent years, and they also do not have a history of |
| averaging about 1% higher interest rates than | | | | expertise in the jumbo loan market. Finally, you need to |
| conforming mortgages. | | | | ensure that you are not heavily focused on the size of |
| Some politicians and regulators feel that by raising the | | | | conforming loans while ignoring other factors such as |
| loan size limit placed on Fannie Mae and Freddie Mac | | | | attracting additional investment capital to the mortgage |
| to as high as $729,500 in high cost areas, the value of | | | | backed securities market or dealing with people that |
| property would be positively affected, especially in high | | | | simply cannot qualify for a loan in the house they are in |
| cost states like California. This is virtually an economic | | | | because they have negative equity or do not have the |
| certainty. Residential real estate historically sells based | | | | income to justify owning the home. |
| on debt ratios. Buyers were expected to spend no | | | | |