Luxury Homes and Home Buyers Stalled by Jumbo Loan Limits

Implications: More and more would be luxury home purchasers are finding their dream cribs just that---dreams.  Two income families with stellar credit scores have discovered that homes exceeding the jumbo loan limit of $417,000 (The cap on what Freddie Mac and Fannie Mae will underwrite.) are often out of reach due to the substantive down payment required to fill in the gap between the jumbo loan amount and the sales price.  In the last several weeks,the national mortgage crisis has metastasized into the high end luxury and custom home market. 

Analysis: Because of the Fannie and Freddie cap at just over $400K,banks and mortgage companies who are trying to close the deal find that they must tap other sources for luxury home funding such as mortgage backed securities.  MBS funding,however,is temporarily drying up as investors run from this asset class. While jumbo loans have always come with higher interest rates than conventional loans,the spread has increased due to the recent constrictions on these products.  For example,as of September 15, 2007,the average rate on a 30 year fixed-rate jumbo loan was 7.36%,versus 6.64 % on a conforming loan according the Department of Housing and Urban Development.  Unless the propsective purchasers are among the mega-rich,the sale of luxury homes will  continue to be contingent upon financing and until the institutional investors are attracted back to the market or Congress votes to raise the conforming loan limits on jumbo mortgages,the situtation will remain stagnant.  The push for legislative action to raise the loan purchase limits for the two GSE giants has pitted former allies against each other.  Realtors want the increase as a tool to reenergize home sales while the Mortgage Bankers Association has decided against endorsing such a move.  One thing is for sure.  If Congress does not act and act soon,the conforming loan limit for jumbo mortgages could actually decline by next year! Why?  Because the ceiling is indexed to home price inflation across the country and,as we all know,in many sections of the nation home prices are in a steady decline.