It has been reported in the news that the House and Senate recently passed the Economic Stimulus Package. The Package will become law once it is signed by the President which should happen some time this week, possibly as early as today. The main provisions of the Package and those that have been widely reported involve tax rebates to consumers.
However, the provisions of the Package that will have the most effect on real estate and, I believe on the economy as whole, are those that involve increases to the limits of Fannie Mae and Freddie Mac loans a/k/a non-jumbo or conforming loans.
Presently, a conforming or non-jumbo loan is one that is in the amount of $417,700 or less. As the average price of Manhattan apartments significantly exceeds $1,000,000 now, most loans taken out to purchase the apartments are non-conforming or “Jumbo” loans since they are in amounts greater than $417,700.
Pursuant to the Package, the conforming limits will be increased nationwide to a maximum amount of $729,750. The increases will be in effect through December 31, 2008. These increases will be available in high-cost areas and in amounts based upon the median area sales price.
To determine the maximum loan amount in high-cost areas that qualify under the Package, the calculation will use 125% of the median area sales price. Pursuant to this calculation, a median area sales price of $583,800 would presumably qualify for the highest loan limits.
The higher loan limits will not be available immediately since several factors will need to be established. First, it will need to be determined how the definition of “area” is addressed. While it is clear that Manhattan real estate below 125th Street (and probably somewhat beyond as well), would significantly exceed a median area sales price of $538,800, it might not be the case if “area” is expanded to include upper Manhattan and some of the boroughs (especially the Bronx). I do not expect this to be the case, however, since it would greatly diminish the impact of the Package (which impact will be addressed in Part II of this Article tomorrow).
Second, Fannie Mae and Freddie Mac will need to pass additional regulations setting forth their requirements for these loans. These will likely (though not definitely) include different underwriting criteria for loans over $417,700 such as higher FICO (i.e. credit scores) and lower permissible loans-to-value.
Finally, Fannie Mae and Freddie Mac, along with the lenders, will need to determine the additional costs associated with these loans. It is expected that due to the additional risk (whether perceived or actual); the rates on these loans will be slightly higher than they are for loans of 417,700. Regardless of this, with jumbo 30 year fixed rate loans averaging close to 7.0% and conforming 30 year fixed rate loans averaging about 5.75%, these new loans will provide significantly better rates than those currently available on jumbo loans.
Based on the mandate from Congress and the fast tracking of this bill, we do not expect the delays in implementation to take too long. We are hoping that these higher limit conforming loans will be available by the end of February. But, in any event, do not expect them to be available later than mid-March.
In tomorrow’s part of the Article, I will address who I believe will benefit from these higher limits. I will also address what I believe will be the impact of this law on the real estate market in Manhattan specifically, the Metropolitan area generally and the economy overall.