Federal Loan Limits

Federal temporary conforming loan limits were enacted as part of the economic stimulus package at a time when financing activity hardly persisted among buyers exceeding the Fannie Mae and Freddie Mac’s $417,000 limit. To increase financing, the limit was raised in February 2008 with a floor of $417,000 to protect low-cost areas and a ceiling of $729,750 elsewhere.

Reducing Loan Limits?

Since then, the Fannie Mae always hinted at the possibility of the reduction of conforming loan limits since the limits have been based on median home prices, and now buyers in areas such as New York and Washington, D.C. will need to watch their calendars closely as high-cost lending will expire after Sept. 30. As a result, many buyers could be forced to choose between resorting to any means of forking over the extra cash to their closing statements, making higher down payments to stay under the limit and applying for jumbo loans. Buyers will generally aim to avoid the jumbo rates, which classify as any amount over $625,500, because the interest is higher.

Panic Over Jumbo Loans

June Phillips, a native New Yorker, senior vice president and associate broker of Halstead Properties, noticed panic over the jumbo loans throughout the summer.

“All my buyers who were looking for a place under $1 million had the jumbo limit in mind, because they knew they’d have to put more money down after Sept. 30,” Phillips said.

Big City Areas Most Effected

Those who are likely to be most affected by the lower loan limits are mainly buyers in high-cost areas that include New York, California, Washington, D.C., and Maryland among others. This is especially true since the process to close out purchases in those locations can take some time and buyers who aren’t already in contract to calculate their statements under the higher limit might be ruled out. Of course, residents of the less populated markets, such as Ohio, may only see as much as a 3.6 percent change in the loan limit size, considerably more reasonable than what’s in store for the big cities this fall. Jonathan J. Miller, president of the Manhattan-based Miller Samuel appraisal firm, predicted that the changes taking place in October will affect around 7 percent of transactions in Manhattan alone. It doesn’t sound like much, but it means a lot considering the timing of the reduction along with other struggles the market faces.

“But considering the housing market still needs a push,” said David Maundrell, president of aptsandlofts.com, “it’s bad timing to lower the limit now… in New York, because of our prices and where they are, it’s going to be an issue.”

I’m pretty sure you don’t know what Yield Spread Premium (YSP) is. It is  hidden in most mortgage transactions until the closing statement is presented and home buyers are ready to close escrow and complete the home buying process. Below is an actual scan of a closing statement is which you can see the YSP among all the other fees that are associated with a home purchase.

In this case the YSP was over $3,800, a hefty chunk of change.

I didn’t even see it, until I re-read the statement 3 years later. It was probably mentioned during the 30 day escrow but at that time your head is spinning with all the docs you have to sign and things to do. Worse thing is, I was really good friends with the mortgage broker, and now that I understand YSP better, I will never look at them the same way.

Why is the YSP not even in a debit column?

because, it is not a direct payment. It is carried into the life of the loan, so not only is it a large amount, but it will be compounded by interest over the next 30 years. That alone will triple the amount.

If you are unfamiliar with YSP, you can do some research on it at the YSP wiki

An inherent problem with the Yield spread premium is that it’s anti-capitalistic. Typically, the borrower has no idea or does not completely understand how the broker is potentially compensated on the back end and therefore can’t truly price out the service being provided to the borrower. The definition of capitalism is a willing buyer, knowing all the facts and circumstances surrounding a service the buyer is considering purchasing (including how much the service provider is being compensated) makes a choice to use the service provider. Since the borrower typically has no idea or does not understand that the broker could potentially get paid on the back end, they can’t compare terms between brokers.

Back to RateWindow.com. Now that I understood YSP better, mind you I’m still a developer, and still don’t understand all the mortgage talk, I was ready to fully jump on board. I’m very proud to be part of the transparent movement now and know that I was the first to develop a web application that turned that $3,800 FEE into a rebate to the consumer.I can only hope for the future an in 5, 10, 15 years I smile when I think of all the rebates people will get with the services I helped make. I think the savings will be in the millions!

Click to check out RateWindow, even if you’re not in the market for a loan, I think you’ll see that it is a much needed service, especially with the current economic conditions of the nation.

In the eyes of a typical homebuyer, what is the lending process like? I'll talk about this in my next blog post.

Subscribe to my feed to get notified of my answer