The New Stimulus Plan: Cure or Rhetoric?

Last week, Congress changed the conforming loan limit to as high as $729,750, as part of its Stimulus plan. This was part of the economic stimulus package signed by Congress and passed on to President Bush for signature on 2.7.08. This change raises the limit from $417,000 on maximum size of mortgages that Fannie Mae and Freddie Mac can purchase and market as securities. Same increases apply to loans backed by the Federal Housing Administration, a government agency that insures loans to borrowers with poor credit. So some loans that were considered jumbo are now considered conforming, which means lower mortgage rates.

The spread between conforming and jumbo loans had reached as much as 1% in recent weeks, because jumbo loans are considered riskier. Due to increase in mortgage defaults and nationwide credit crunch, banks have become more hesitant to create loans that couldn’t be later sold to Fannie and Freddie. Thus, higher interest rates were extended for these loans.

This new law affects investors and homeowners in 2 ways:

1) Firstly, it is designed to sell homes easier in higher priced areas, by making the mortgages more attractive to buyers.

2) Secondly, the lower rate will save homeowners money on their mortgage payments. Owners of existing mortgages can now refinance to a lower rate. What does this mean for investors? An opportunity to make some monthly cash flow! If you have a property that was bought at a jumbo rate, this is the time to refinance and perhaps see some cash appear in your pocket.

According, to AP, “Fannie Mae CEO Daniel Mudd said last week that over the past few years home prices rose so high in parts of the Northeast and West Coast, hiking the loan limits became necessary.”

The new increased limits, however, are temporary and are set to expire at the end of the year. It also excludes Fannie and Freddie from buying loans over the $417,000 limit made before July 1, 2007. However, old loans that are refinanced are considered new loans and thus can be sold to Fannie and Freddie.

It remains to be seen what impact this new law will have on home sales, as it applies to only 20 of the 160 metro areas in the U.S. Expensive real estate areas like New York and California stand to benefit the most from this plan. I suspect that reducing conforming limits simply brings mortgage rates closer to reality, to coincide with property values that had grown for years before coming to a screeching halt in 2007. I don’t believe that it will be easier to sell a house in excess of $417,000 than to sell a house under that amount: there is no shortage of either type of property out on the market. This is most definitely NOT a seller’s market. However, I do believe that allowing owners and investors to refinance will provide somewhat of a relief, and perhaps even save a couple of folks from foreclosure. I would be curious to see if it produces any positive cash flow for investors in my network.