It’s official: jumbo loan limits are shrinking from “jumbo” to “extra large” instead. One by one, banks are cutting off their conforming loans at the $625,500 limit that Fannie will impose come September of this year (this is down from the current $729,500 limit). At first, upon learning of the lower jumbo cut-off, we started imagining the worst in terms of property prices and the overall NYC housing market. It took a few conversations with some mortgage professionals to put things into perspective.
Most mortgage professionals, in fact, believe the downward $104k shift to have an overall minor impact on our market. “The hit is not so onerous as to prevent buyers from purchasing a new home,” one said. Whether getting a jumbo or a conforming mortgage, the process remains largely the same. The advantage seems to fall on the lap of bigger banks because they have the larger balance sheets to be able to underwrite and hold a larger number of loans. They need to hold them because currently they can only sell off to Fannie those loans that meet its guidelines, the only secondary market that exists for loans right now. “Fannie can’t support the mortgage market for an eternity; eventually, banks will have had to put those loans on their balance sheets anyway.” Spreads are already beginning to shrink between jumbo and conforming rates based on this development, as the market begins pricing in the new limits.
The one housing segment that is expected to be impacted the most by this shift is the FHA-approved condominiums, many of which are on the outskirts of Manhattan and in Brooklyn. If the list price of an apartment in these buildings were $729k, a buyer could put 3.5% down and purchase as close to the jumbo limit as possible with a minimum down-payment. Now, the pool of apartments available to such buyers will be topped out at the $625k mark, leaving a small niche of apartments to fend for themselves in the regular lending marketplace. Basically, if you’re an FHA buyer, you have less home you can buy. Consequently, developers who were counting on that easy financing for their $700k units will either have to discount them further to get them to conform or wait it out for non-FHA buyers to absorb those units.
Many believe this to not be such a bad thing: asking owners to have more skin in the game. Furthermore, the argument continues that, although FHA was meant to help those with fewer financial means to secure a home, apartments in the $700k range were not targeting those demographics to begin with and therefore overstepped its initial intentions.
The important take-away from this all is that the home ownership landscape is slowly reverting back to sanity – a world in which buyers will need to save for that down-payment, in which their income is verified and in which annual double digit housing returns is a thing of memories.
For more information around your specific mortgage needs, contact David Axelrod on the banking side at david.axelrod@bankofamerica.com and Matt Jablonski on the brokerage side at mjablonski@mortgagemasterinc.com .
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This should really have almost zero impact. If you are taking out a 729k loan, but are only putting down 3.5% you are doing something very wrong. If you have the income to pay off a loan of that size, wait it out a year until you can put a real down payment down!