Fannie and Freddie's Mortgage Size Limits Won't Drop in 2014

Female Real Estate Agent in Front of Sold Home For Sale Sign and House.
By Margaret Chadbourn

WASHINGTON -- The maximum size of U.S. home loans that taxpayer-owned Fannie Mae and Freddie Mac can buy will hold steady next year, their regulator said on Tuesday, deferring a decision on when to pull back government support for the housing market.

The mortgage financiers will continue to purchase loans up to a maximum of $417,000 in most areas, the Federal Housing Finance Agency said. In more expensive markets, such as Los Angeles and New York, the cap will remain at $625,500.

The limits were raised in 2008 to help keep the mortgage market liquid during the financial crisis, and the agency had begun to consider lowering them as the housing market recovered to allow private capital to support more home loans.

Last month, it said any changes would be phased in and announced six months before they were implemented to avoid economic disruptions.

In announcing its decision on Tuesday, the FHFA said the housing market was not showing enough strength to warrant lowering the limits now. It is expected to wait until sometime next year before deciding on any future reduction.

Some housing industry leaders and lawmakers have expressed concern that reducing the limits could shut out buyers and impede the housing recovery. Investors might not be willing to take the risk of buying mortgage-backed securities without a government guarantee, they cautioned.

Analysts, however, say a decrease would affect only a sliver of the market, about 2 to 3 percent.

"The housing market isn't going to flourish because of this announcement, but in some markets this eliminates a threat for 2014," said Jaret Seiberg, a senior policy analyst at Guggenheim Securities. "This is broadly positive for housing, but it's not the secret cure that's going to give us a healthy market."

Fannie Mae and Freddie Mac, which were seized by the government at the height of the financial crisis, do not make loans. They purchase mortgages from lenders, which they either keep on their books or bundle into securities that they offer to investors with a guarantee. They currently back about two-thirds of new U.S. home loans.

FHFA Acting Director Edward DeMarco wants to wean the housing finance system off this dependence on the government, but U.S. Rep. Mel Watt (D-N.C.), nominated by President Barack Obama as the next head of the agency, is expected to move cautiously.

Seiberg said Watt, who could be confirmed in the post by the Senate as early as next month, was not as prepared as the staff at the FHFA to lower the limits.

"Government policies continue to constrain credit more than economic conditions warrant and the result is the housing market is less robust than should it should be," said Seiberg.

Which Is the Best Mortgage for You?
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Fannie and Freddie's Mortgage Size Limits Won't Drop in 2014

With the subprime mortgage mess unfolding all around us, there's never been a better time to make sure you make the right mortgage decision.

Of course, no single loan is best for all circumstances, but the following eight loan types work better than most when matched to your individual situation and lifestyle.

Next: For the Long Haul

Loan to consider: 30-year fixed rate

Why: Financial peace of mind can be worth the higher interest rate that won't change for three decades.

Next: Refinancing
(15-20 yrs before retiring)

Loan to consider: 15- or 20-year fixed or ARM

Why: You can retire the loan before you retire from your job. A fixed rate generally costs more than an adjustable, but will give you more certainty in budgeting. However, if ARMs are a lot cheaper and your income can handle possible payment increases, you could save with the adjustable rate.
Next: Recent Graduate
(With strong potential for increased earnings)
Loan to consider: 1-year ARM Why: Stretch your dollars with low interest rates during the years when your income is at its leanest. Your rate can go up (or down) each year, but rate caps will limit that change to a predictable amount, and your rising income should be able to handle it. Watch out for loans that cap your payment instead of your rate. They could cause your indebtedness to grow.
Next: Self-Employed

Loan to consider: No- or low-documentation loan

Why: Though you'll pay a higher interest rate, not having to produce paycheck stubs or employer references, as you would be expected to supply when applying for a traditional loan, can be a huge help to those with variable incomes.

Next: 4-5 Year Plan

Loan to consider: A 5/25 hybrid loan

Why: If you won't keep the loan longer than five years, why pay extra to lock in an interest rate for a longer period? If you do end up staying longer, you can either refinance or live with an interest rate that adjusts every year.

Next: Good Income, but ...
Loan to consider: Option ARM
Why: With these very risky loans designed for people with incomes that vary monthly, each month you have a choice of payments: the full amount needed to pay off principal and interest, an amount that covers only the interest, or an even smaller amount that doesn't even cover interest owed. Over time, however, your required payments could rise significantly if you often choose the smaller payments.
Next: Job Relocation
(With good income, savings)
Loan to consider: Interest-only
Why: While these loans can be risky for novice borrowers or those stretching to afford a home, they can be a smart tool for savvy borrowers who already have assets built up. Monthly payments are low because you're not repaying principal, so you can afford a larger loan. If you sell the home for less than you paid, however, you have to come up with the difference.
Next: Military or Veteran
Loan to consider: VA loan

Why: The U.S. Department of Veterans Affairs offers loan guarantees that allow qualified military personnel and veterans to take out mortgages for as much as $417,000 with zero down payment. In Alaska, Hawaii, Guam and the U.S. Virgin Islands, that loan amount goes up to $625,000.

Next: More on Mortgages
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