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Conforming Mortgage Refinance Limits

Before getting too excited about a rate on a proposed refinance loan, homeowners should consider the conforming mortgage refinance limits prior to choosing a loan type. Starting in 1970, Fannie Mae was authorized by the United States Government to purchase residential mortgage loans. Fannie Mae worked with Freddie Mac to develop uniform mortgage documents and national standards for what would come to be known as a conforming loan. The Office of Federal Housing Enterprise Oversight (OFHEO) set the criteria on what constitutes a conforming loan limit that Fannie Mae and Freddie Mac can buy.

A temporary increase in the Conforming Loan Limits for high-cost areas of living has been incorporated into the 2008 economic stimulus package. The bill was signed by former President Bush and then President Obama. The new Jumbo-Conforming program has been adopted by Fannie Mae and Freddie Mac effective April 1st until valid through December 31st each year.

According to BankRate, refinance mortgages are divided into two types, depending on the loan amount. Until this month, a mortgage of $417,000 or less was a conforming loan, and a mortgage greater than that was a jumbo loan. Interest rates on jumbo liens are about a percentage point higher than rates on conforming loans.

The goal of the stimulus is to allow people in high-cost areas to refinance their mortgages at rates that are lower than those for jumbo loans. Now, there is a $417,000 conforming limit in most of the country and varying jumbo-conforming limits in high-cost areas, with a ceiling of $729,750 or 125% of the average home value within the metropolitan statistical area (MSA). This increased ceiling is effective until December 31, 2008.

"These provide a tremendous opportunity for many people who previously could not have refinanced," says Nicholas Bratsafolis, chairman of New York-based Refinance.com. Unfortunately, the anticipated interest rate decline didn't happen. The spread between the old conforming loans and the new conforming loans remained high, up to .75%. Prior to the fall of 2008, they were as low as .25%. In spite of the raised limit in conjunction with the multiple rate cuts by the Fed, the mortgage lending system remains at a standstill. The increase in this spread has come primarily from an overall rethinking of credit risk. This analysis has resulted in decreased liquidity in housing markets.

"The jumbo-conforming mortgage spread started widening from 0.16 percent in late July 2007, reaching a peak of 1.90 percent in late March 2008, and narrowing somewhat since then," said Norbert Mehl, CEO of BanxQuote. "Nevertheless, this extraordinarily high spread, combined with rising mortgage rates, tighter credit standards and disappearing adjustable rate jumbo mortgages, continues to present a challenging outlook for the housing, mortgage and banking markets, and particularly for the luxury end of the real estate market."

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