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Rates may shrink on jumbo mortgages

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Lower interest rates would "make borrowing cheaper for people who have been stuck in jumbo loans (and would) be a very positive thing," Seslen says.

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Interest rates on jumbo loans recently have been approximately 1 percent higher than rates on conforming mortgages, according to Shane Backer, a branch manager at Robbins & Lloyd Mortgage in Manhattan. If that spread narrowed, homebuyers in high-cost housing markets would be able to borrow more money to buy a home while homeowners in those markets who refinanced a larger loan could save hundreds of dollars each month on their house payments, Backer explains.

Freddie Mac CEO Richard F. Syron recently told a group of homebuilders at an industry convention that the higher limits should allow the two mortgage finance companies, Freddie Mac and Fannie Mae, to "inject liquidity and thus help enable reduced rates within this jumbo market." But Syron also said it will take "considerable effort and resources" for Freddie Mac to "develop the systems to handle jumbo mortgages" and "a good deal of capital" to buy and securitize them.

A Fannie Mae representative issued a brief statement that says the higher loan limits would "help bring stability, liquidity and affordability to an important part of the housing finance system." The term "affordability" might hint at lower interest rates.

However, the new law doesn't mandate lower rates, and neither Fannie Mae nor Freddie Mac nor the FHA has promised lower rates on the new bigger mortgages.

Indeed, some observers have suggested that investors might demand higher returns on securitized loan packages that contain larger mortgages, which, according to Seslen, are more often paid off early. If that happens, the interest rates might not be much more attractive than the current rates on jumbo loans.

Cheaper loans could help housing markets
Lower interest rates on bigger mortgages could make housing more affordable in high-cost housing markets and that could spur more sellers to put their homes on the market and entice more buyers to purchase homes in those areas, Seslen says.

"If people see an opportunity in the form of cheaper borrowing, that could be the tipping point that gets a lot of people back into the market," she says.

The National Association of Realtors, which supported the legislation that raised the loan limits, estimated the benefits of the change as follows.

Benefits of loan limit changes
Higher Fannie Mae and Freddie Mac limits would result in:
Up to 500,000 additional refinanced loans.
Up to 210,000 fewer foreclosures.
More than 300,000 additional home sales.
Higher FHA loan limits could:
Help an additional 138,000 households buy a home.
Enable nearly 200,000 homeowners to refinance an existing mortgage.
Combined, higher conforming and FHA loan limits could:
Strengthen home prices by 2 percent to 3 percent nationally.
Bolster the severely stressed housing finance market.

The higher loan limits are set to expire at the end of this year, though Congress could make the new limits permanent or extend the deadline as it recently extended the federal tax-deductibility of certain mortgage insurance premiums, Backer suggests. "I think they will extend (the higher loan limits), if it helps the economy."'s corrections policy -- Posted: March 6, 2008
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