UPDATE MARCH 10, 2008 —- Fannie Mae and Freddie Mac have raised the conforming loan limits.  Go here for the update. 

If you follow the news even a little, you have read about the ”economic stimulus” package, formally called the Economic Stimulus Act of 2008.  The Act was signed into law by President Bush on February 13. The stimulus package is designed to kickstart the flagging economy through, among other things, increasing the conforming loan limits.  What does this mean for you?

Background on Conforming Loans

There are two privately-owned government-sponsored corporations that help bring liquidity to the mortgage market.  Fannie Mae and Freddie Mac are willing to buy loans from lenders as long as the loans meet certain criteria.  Such loans are known as conforming loans.  Loans that do not meet the criteria are known as non-conforming loans. 

In order to be a conforming loan, the loan amount must be less than a certain threshold.  The threshold is adjusted each year.  The threshold for 2007 was $417,000.  If you obtained a mortgage in 2007 for $417,000 or less, you paid a lower interest rate.  If the amount of your mortgage was greater than $417,000, your loan was a “jumbo loan.”  Jumbo loans carry a higher interest rate than conforming loans because lenders cannot sell jumbo loans to Fannie Mae or Freddie Mac.  The interest rate difference typically ranges from 0.5% to 1.0%.

Economic Stimulus Package

The Economic Stimulus package allows Fannie Mae and Freddie Mac to increase the threshold loan amount to as high as $729,725, depending on the median cost of housing where you live.  The policy goal is to increase the number of homeowners with conforming loans and lower interest rates.  Lower interest rates translate into homeowners with lower mortgage payments and consequently more money to spend stimulating the economy (we’re told). 

Should You Rush to Refinance? Not So Fast

Does this mean all of us with nonconforming loans should rush out to refinance?  Probably not.  First of all, the Economic Stimulus package allows Fannie Mae and Freddie Mac to increase the conforming loan limit, but it does not require them to increase it.  Shortly before the Stimulus Act was signed into law, Fannie Mae and Freddie Mac had announced that the 2008 threshold amount would not increase from its 2007 level.  There is uncertainty whether they will now do an about-face and increase the threshold after all.  Remember, while Fannie Mae and Freddie Mac are government-sponsored, they are privately-owned and must do what’s best for their shareholders. 

Depends Where You Live

If they choose to raise the threshold, it will happen on an area-by-area basis.  In other words, the threshold may rise to $729,725 in expensive areas (e.g. San Francisco, San Diego, Orange County), rise to a lesser amount in moderate areas, and stay the same in less expensive areas.  Overall it appears that about 85% of the U.S. would qualify for a higher threshold, but only a small number of areas would qualify for the maximum $729,725 threshold amount.

Depends on When you Refinance

Assuming Fannie Mae and Freddie Mac choose to increase the threshold, the higher threshold will be effective for loans originated between July 1, 2007 and December 31, 2008.  After 2008 the threshold will apparently decrease back to its pre-Economic Stimulus amount.  The retroactive effective date to July 1, 2007 creates the interesting possibility that a non-conforming loan obtained during the second half of last year could become a conforming loan retroactively.

Conclusion

If you were hoping the Economic Stimulus package would allow you to refinance your mortgage at a better interest rate, you may have to wait a while.  Rates haven’t gone down yet.  It’s not clear if they will.  Add in the subprime problems that seem to have affected the rest of the mortgage market, and it may not be a good time to refinance.  All you can do is keep an eye on mortgage rates and hope the threshold conforming loan amounts will increase where you live. 

(UPDATE: This article at Fortune indicates that current mortgage rates on conforming loans are unusually low, while rates on jumbo mortgages are unusually high.)

Links

If you want to read more detail about the Economic Stimulus package and its effect on the conforming loan threshold amount and interest rates, I found the following articles to be helpful:

Searchlight Crusade
Patagonia Finance
MarketWatch
Wikipedia (Conforming Loan)