By Steve Adams
The Patriot Ledger
Recent changes in mortgage rules are making it harder than ever for househunters to qualify for a loan and threatening to deal another setback to the vulnerable real estate market.
On Oct. 1, the federal government lowered the maximum price for conforming loans – those that can be purchased by Freddie Mac or Fannie Mae – in hundreds of high-cost housing markets, including most of Greater Boston.
The maximum conforming loan limits dropped from $523,750 to $465,750 in Norfolk and Plymouth counties. That means people looking to borrow more than $465,750 for a single-family home will likely be pushed into a jumbo mortgage, with interest rates that are up to 0.75 percentage points higher than a conventional mortgage.
The change has had an immediate effect upon some buyers’ abilities to qualify for a loan, said Laurie Cadigan, owner of Barrett Company in Concord and president of the Massachusetts Association of Realtors.
“It’s going to impact a lot of people,” Cadigan said. “Even $20,000 to $40,000 is a huge difference to people in that price range.”
On the South Shore, the changes could have the biggest effect in a half-dozen towns where median asking prices for single-family listings are significantly higher than the new conforming loan limits. They also could have a broader effect on the housing market, agents say, by putting a damper on the trade-up market and shrinking inventories of entry-level home listings.
Because government-sponsored mortgage companies Freddie Mac and Fannie Mae buy conforming loans, they are considered safer risks by mortgage originators.
As recently as 2006, jumbo mortgages’ interest rates were just 0.2 percentage points higher on average than traditional mortgages, said Paul Bishop, vice president of research for the National Association of Realtors. They’re now nearly 0.75 percentage points higher, Bishop said.
“That can make a fairly significant difference in terms of someone’s payment,” Bishop said.
Lenders also are often requiring bigger down payments in jumbo mortgages, Bishop said.
Higher-risk jumbo mortgages – or those that exceed the conforming loan limits – can be kept on the balance sheets of banks and mortgage companies, or resold on the private market. But private investors have retreated from investing in jumbo loans because of credit concerns.
“They are a lot more conservative in their underwriting, and one of the ways they do that is have higher interest rates on the loans,” Bishop said.
Mary Buck, a vice president with Hanover-based Rockland Trust, said homes in the $500,000 to $600,000 price range will be most affected by the changes. “The rates will be higher so the borrowing power will be reduced significantly,” Buck said.
Housing sales figures for October are not yet available, but NAR research indicates that the new guidelines are already affecting sales in high-cost markets.
The NAR surveyed members in high-cost markets in October. Nearly half of respondents said they had clients who had experienced some negative impacts as a result of the change, with 52 percent saying the buyer needed a larger downpayment.
And 16 percent said they had clients who had abandoned their home search entirely. Of that group, nearly two-thirds said they did not have enough money for a downpayment.
The U.S. Senate recently approved an amendment to a Housing and Urban Development appropriations bill that would hike conforming loan sizes again.
The amendment would raise them to 125 percent of an area’s median sales price, up to a maximum of $729,750. The housing industry is now lobbying the House of Representatives to pass the legislation.
“The housing industry doesn’t need anything else right now to slow things down,” said Marcia Solberg, president of the Plymouth and South Shore Realtor Association.
Steve Adams may be reached at sadams@ledger.com.