Conforming Mortgage Limits Going Up

The Maximum limit on conforming home mortgages is going up as of January 1, and that will potentially save borrowers big bucks in interest payments. Freddie Mac and Fannie Mae, the nation's major buyers of home mortgages, have announced they will implement an increase in their single-family mortgage loan limit from $359,650 to $417,000.

This increase in conforming loan limits is based on changes in the average home prices, as published by the Federal Housing Finance Board. The figures come from monthly surveys of lenders. Both new and existing homes are included in the surveys. The increase in the single-family mortgage loan limit makes it possible for an estimated 500,000 additional families to obtain lower cost mortgage financing.

Freddie Mac estimates that total mortgage interest savings for a borrower with a typical 30-year fixed-rate mortgage at the new conforming loan limit is as much as $24,700 over the life of the loan. The ceiling on loans insured by the Federal Housing Administration will also rise next year to about $362,790. That's about 87 percent of Freddie Mac's limit. The change will take place in about three dozen high-cost markets.

The changes are good news for consumers nationwide. But real estate leaders in the highest priced markets (primarily on West and East Coast areas) say they don't go far enough. “While this is good news for many homebuyers, the new increased limits are not enough to benefit most homebuyers in California ,” said Vince Malta, president of the California Association of Realtors. “Conforming loan limits need to more accurately reflect the cost of housing in our state, where the median price of a home is more than double that of the nation.”

Mortgage Applications Remain Strong

As we enter the last month of 2005, the number of applications for refinance mortgages is dropping a bit, according to the Mortgage Bankers Association. The volume is down by 1.8 percent on a seasonally adjusted basis from a week ago. The refinance share of mortgage activity is now 39.1 percent of total applications. On the other hand, applications for mortgages to finance the purchase of homes are up by 0.8 percent.

That's a very positive report considering we're in the holiday season. Mortgage rates are still at historic lows, and that's motivating many consumers to apply for and lock-in a rate soon before rates push upward, as they inevitably will. During the last half of November rates actually decreased slightly -- to an average rate of 6.28 percent for a 30-year fixed-rate mortgage (December 1 rate). But all analysts agree that those rates will rise in year 2006.

Pressure Building to Kill Proposed Tax Bill

There is growing pressure in Washington to kill a presidential panel's tax reform proposal that would eliminate or sharply curtail the mortgage interest deduction and do away with state and local tax deductions. Several members of the House Ways and Means Committee are responding to pressure from their constituents to abort the proposal. Eight members of the committee recently sent a letter to Treasury Secretary John Snow urging the administration to “preserve some important incentives for homeownership investment that clearly work.”

The letter continues … “While many investment opportunities exist today, perhaps none provides more in return for individuals, families and communities than homeownership. That's why we urge you to preserve the d eductions for mortgage and home equity interest, and state and local taxes, which underpin homeownership and the social and economic benefits it generates.” The proposal was presented in November by the President's Advisory Panel on Federal Tax Reform as part of an overall attempt to revamp the tax code. It calls for replacing the popular mortgage interest deduction with a far more limited 15 percent tax credit.

It would also eliminate deductions for state and local taxes (including property taxes) and interest deductions for home equity loans and second homes. It would also eliminate the Low Income Housing Tax Credit that accounts for the construction of about 130,000 affordable rental housing units annually. One member of the Ways and Means Committee, Jerry Weller, calculated that a typical middle-class home owner would see a tax hike of $2,000 to $2,500 if the advisory panel's tax plan went into effect.

Temporary Buydown Mortgage Re-emerging

A type of home mortgage that's new to many consumers – the temporary buydown mortgage – is becoming more popular. Actually, it's being revived after being used extensively decades ago. The reason for its revival is the creeping up of mortgage interest rates and home prices that continue to rise. An increasing number of home buyers are finding it difficult, if not impossible, to qualify for a needed mortgage to buy a home in today's market.

As the name implies, a buydown mortgage is one in which the interest rate during its initial years are lower than the prevailing rate. It is “bought down” with a sum of money paid at closing. This makes the loan more affordable for marginal home buyers. One popular loan is the 2-1 buydown mortgage. This loan starts with a substantially lower rate for the first year, then the rate notches up during the second year, and finally rises to the actual prevailing rate for the third year and for the remainder of the loan term.

As an example, if the current average market rate for a conforming 30-year, fixed-rate mortgage is 6.3 percent, the rate during the first year of a 2-1 buydown loan would be 4.3 percent. In the second year of the mortgage the rate would rise to 5.3 percent. The third year, it would rise to 6.3 percent (the prevailing market rate) and would remain there for the remainder of the loan term. There are, of course, variations on this loan offered by different lenders.

The initial cost of the buydown is usually paid by the individual home seller to make it possible for the buyer to qualify for financing, or by a home builder who is marketing new homes, or a corporation that is making extra efforts to accommodate an employee buying a home after being transferred to a new community.

A temporary buydown mortgage is the most effective way to enhance a borrower's qualifications because the interest and payment reduction is concentrated in a few early years of the loan. Today's mortgage bankers are becoming very creative in putting together mortgage plans that help borrowers qualify for financing a home purchase.

EEM Mortgages Gaining Popularity

On the subject of special home mortgage plans, an increasing number of home buyers are opting for an Energy Efficient Mortgage (EEM). With this mortgage, the buyer can finance not only the home but also improvements to the property that will make it more energy efficient.

Such a mortgage stretches the qualification capabilities of the buyer because the energy efficient improvements will decrease expenses for maintaining the home, thus making it possible to qualify for a larger loan and perhaps a better home. It will also transform an older, less efficient residence into a more comfortable and affordable home, thus enhancing its market value.

The normal home purchase mortgage is increased to cover the cost of subsequent energy improvements, and that will increase your payments slightly. But you will probably save money in the long run because your energy bills will be lower. For more information, discuss it with your mortgage lender or broker.

New Home Sales Surprisingly Strong

The number of new home sales in October surprised the analysts, according to a report from the National Association of Home Builder issued in late November. Sales jumped 13 percent to a record seasonally adjusted annual rate of 1,424 million units in October. That's 9 percent above a year ago.

“The great strength of new-home sales was indeed surprising,” said David Seiders, NAHB chief economist. “The upshift in interest rates may have pushed a lot of fence sitters into a buying mode, and builders may have deepened sales incentives to counter growing buyer resistance to home prices and interest rates.”

A Perspective on Mortgage Rates

Mortgage interest rates are continuing to rise, but at a slower pace than previously predicted, and occasionally a week or more goes by without an increase in rates. There are even brief periods when rates decline. At this writing, the average rate for a 30-year fixed-rate mortgage is 6.28 percent – reflecting a slight decrease over the last couple of weeks. Fortunately for borrowers, mortgage rates are still at historically low levels. Last January the average rate was 5.77 percent. In March the rate was 6.04 percent. The rise has indeed been gradual, but continued increases are inevitable.

Many home buyers and those who want to refinance their existing mortgage are taking action now to avoid higher rates and monthly payments in the future. The strong pace of home sales this year will combine with very strong home price appreciation to propel purchase mortgage originations to increase by about 14.5 percent from last year's record level, according to the Mortgage Bankers Association.

Another interesting development in the current mortgage market is the narrowing of the rate difference between the 30-year fixed-rate mortgage and the adjustable-rate mortgage (ARM). The average rate for the one-year ARM is now 5.46 percent. That's making the fixed-rate mortgage much more attractive and popular with today's mortgage applicants.

Homeowners Need Mortgage Savvy

More than half (52 percent) of U.S. homeowners were not very knowledgeable about mortgage options available to them at the time they purchased a home, according to a survey taken by Radian Guaranty, a provider of mortgage insurance. “These survey results suggest that lenders and others in the financial services arena have a real opportunity to help people by educating them about their personal finances, particularly the many mortgage options available to home buyers,” said Mark Cassale, Radian executive vice president. “A home is generally the largest purchase individuals will ever make, and they have a right to know how to find and negotiate the best deal they can make for themselves.”

Among all homeowners surveyed, only 48 percent said they were knowledgeable about mortgage options available to them. Those claiming to be knowledgeable were mostly over the age of 55, were divorced, windowed or separated, and have at least a college education. In general, similar proportions of women and men homeowners said they were knowledgeable about mortgages. Slightly larger proportions of homeowners in the West and Northeast claimed to be knowledgeable, as compared with those in the South and Midwest , the survey results noted.

HUD Info to be More Accessible

A new ruling by the Department of Housing and Urban Development (HUD) will make important mortgage-related information more accessible to consumers. HUD has published a final rule that establishes procedures for communicating certain types of loan data on mortgages purchased by Fannie Mae and Freddie Mac, the two major buyers of home mortgages. The new rule will have the effect of making the data available to the public, thus facilitating research on affordable lending and housing markets, according to a HUD report.

The rule establishes new procedures to allow for additional circumstances where data currently classified as proprietary could be reclassified as non-proprietary data. It allows public release of mortgage data that HUD decides to reclassify as non-proprietary. Another new provision will permit HUD to reconsider the proprietary status of data that have aged at least five years, and to reclassify such data to non-proprietary status on a case-by-case basis. The action is plugged in to the general trend of providing more information to consumers about factors affecting their financial welfare.

Churches Vulnerable to Eminent Domain Actions

Readers of this newsletter are often the source of viable information input. For example, last month I focused on the very unpopular decision by the U.S. Supreme Court that would allow local governments to take title to homes and other properties by “eminent domain” proceedings, then turn them over to developers who would create a more positive and productive use for the property, in the government's view. This was determined in the court's Kelo v. City of New London case.

After reading this piece, reader Colleen O'Boyle added the following information: “This ruling has created a special threat to religious properties. As developers eye local properties that can be seized for profit, state and local government officials look to increase their tax base.

“Tax-exempt by nature, property owned by religious institutions will now be a natural temptation to government authorities who could exercise eminent domain in the name of `public good' in order to sell land to private developers and generate more tax revenue. I work with The Becket Fund for Religious Liberty who works to legally protect the endangered churches, mosques and temples across the country, and am very concerned about this new court ruling.”

Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers – along with freelance features.  Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: storyjim@aol.com.