In anticipation of the expiration of current loan limits on Sept. 30, 2011, Bank of America has decided to stop accepting conventional and government applications for loan amounts that will exceed the permanent loan amounts.  The deadline to submit loan applications was July 1.

According to an email from Bank of America, conventional loans that exceed the permanent loan limits will now be required to use non-conforming programs.

Barring Congressional action, the maximum FHA, Fannie Mae, and Freddie Mac conforming loan limit will decline to $625,500 beginning Oct. 1, 2011, from the current $729,750 limit, though the majority of counties will fall far below the $625,500 maximum. 

In San Diego county, the limit will be much lower! For single units (homes condos etc.) it will be $546,250 and for 2-4 unit buildings the limits will be $699,300, $845,300 and $1,050,500 respectively.

The conforming loan limit determines the maximum size of a mortgage that FHA, Fannie Mae, and Freddie Mac government-sponsored enterprises (GSEs) can buy or guarantee.  Non-conforming or jumbo loans typically carry a higher mortgage interest rate than a conforming loan and require a higher down payment, increasing the monthly payment and negatively impacting housing affordability for California home buyers.

SO WHAT DOES THAT MEAN FOR YOU?

Anyone who is trying to buy or sell a home below these limits will find no real change in the loan process but should expect prices to increase, while those above these limits will find the market slowing.  Why? It will be harder to sell in the higher price range because of a drop in demand due to fewer people being able to come up with the higher down payment required for the ‘non-conforming’ loan. I expect prices to drop in those areas. Ironically I expect buyers in the lower price range to compete more for the homes they can afford and thus those homes will increase in value, driving the ones close to the limit higher in price and perhaps even above it.  The result: There will be a bifurcation of home values, with the demarcation at the loan limit. That will impact a large number of both buyers and sellers, with the markets reacting in very different ways.

Over the long-term I anticipate the banks will stop overreacting to the mess they created previously and return to a more centrist, logical view to lending when the markets will again achieve balance. But don’t expect that for 2-4 years.

Our only hope is that Congress will act to buffer the expected change. So contact your representatives and ask them to support the real estate market, and thus the economic recovery, by toning down the too strict rules against non-conforming loans.

Please call to discuss or comment.