President Bush and Congress announced an economic stimulus package plan that has provisions to address the mortgage market which could promote home buying. The bipartisan proposal aims at accessing cheaper and easier mortgage in certain housing markets.
Also, the plan intends to make mortgage refinancing easier which could help limit foreclosures. The stimulus package proposal lifts the maximum dollar limit, on mortgage loans that are eligible for purchase by Fannie Mae and Freddie Mac from the current $417,000 to a new cap of $625,000.
The new cap of $625,000 will be in place for twelve months, making it easier to do a mortgage refinance. Mortgage refinancing has been on the rise in the recent past. Last week saw an increase in mortgage application volume by 8.3 percent, according to the Mortgage Bankers Association (MBA). The application volume index jumped from 906.4 to 981.5. The rise in the index is mainly due to mortgage refinancing by consumers. The lower interest rates led many homeowners to go in for home loan refinancing; thus making up 66 percent of all applications last week.
The increased cap on home loans makes pricier homes more accessible to homebuyers looking to buy homes worth more than $417,000. Under the current law, jumbo loans apply to any home loans above the $417,000 Fannie Mae and Freddie Mac home loan mortgage limit. In 2007, the credit markets contracted and lending practices became stricter leading to less accessible mortgage loans. In certain markets like California, depending on the area, a $417,000 home is considered lower-end and people were not able to qualify for the jumbo loans.
By raising the loan cap for jumbo loans to above $625,000, mortgage restrictions will lessen and so will interest rates, as jumbo loan interest rates are higher than non-jumbo fixed rate mortgages. For instance, the interest rate difference between jumbo loans and fixed rate mortgages this week was about 1 percentage point.
The raising of the loan limits will help take some inventory off the table by allowing Freddie Mac and Fannie Mae to buy mortgages above $417,000 to $625,000 as well. The stimulus package could boost public confidence and get some potential home buyers to finally buy a home.
The renewed interest in home buying could cut the average time of homes staying on the market by half. The stimulus package proposal is hoping for a reinvigorated mortgage and housing real estate market which is long overdue.