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US Government removes support at upper end of home market

Higher limits on the size of home mortgages that the government buys or insures, which had been increased in 2008 in order to provide liquidity to a mortgage market crippled by the subprime meltdown, ended at the beginning of the month.

The cap on the size of so called jumbo mortgages eligible for government backing in the most expensive real estate markets including Washington, D.C., California and the New York City metropolitan area is now $625,500, down from $729,750.

The cap, known as the confirming loan limit, determines the maximum size of mortgages the Federal Housing Administration, Fannie Mae and Freddie Mac can buy or guarantee, a system designed to add liquidity to the mortgage market by taking mortgages off banks' balance sheets, allowing them to offer new loans.

Analysts say the decrease will affect only a sliver of the market, about 2 to 3%. But many say any decrease could be harmful, given the already weak state of the housing market.

‘Why do any damage at all when the housing market is this fragile?’ said Mark Willis, a research fellow at New York University's Furman Center for Real Estate and Urban Policy.

‘We're not debating the right levels for these loan limits, but the question is, 'Why do anything at this moment to weaken what is already an unsteady market?’, he added.

The reduction in the loan limit is part of an effort to start reducing the government's footprint in the mortgage market and revitalize the role of private lenders, an effort that has been backed both by President Barack Obama and Federal Reserve Chairman Ben Bernanke, as well as some Republicans in Congress and the FHA itself.

As government support fades, some buyers who fail to meet the standards of private lenders will be locked out of this jumbo loan market. Others will face higher borrowing costs and will need pristine credit histories to secure mortgages.
The average interest rate for a 30 year fixed rate mortgage for a non jumbo loan is 4.05% compared with 4.81% for a jumbo loan, according to

‘It will reduce the buying power,’ said Dan Laytham, a real estate agent for Long & Foster who has worked in the Northern Virginia suburbs of Washington, D.C., for more than 20 years. He expects the market for higher-priced homes in the area will soften on the change.

The government now supports about 90% of the residential mortgage market through loans financed by Fannie, Freddie, and the FHA. The expiring higher limits at Fannie and Freddie represented around 3% of the overall market in 2010, according to the regulator of the two firms, the Federal Housing Finance Agency.

An estimated 40,000 to 45,000 borrowers annually will be affected by the shift, representing about $30 billion in loan originations, according to analysts at Credit Suisse Group.

They said the drop in the conforming loans limits would likely raise interest rates on those loans by 30 to 50 basis points, or 0.30 to 0.50%.

The FHA provides mortgage insurance to borrowers who might not have a sufficient down payment to qualify for a prime loan or who may not have high incomes. Buyers can put down as little as 3.5% with an FHA loan.

Already active lenders in the jumbo market, major banks, including Wells Fargo and Bank of America, originated $87 billion, or nearly half of all jumbo loans, in 2010, according to Moody's Investors Service.

Independent private mortgage bankers, local banks and portfolio lenders also originate and service their own jumbo loans.