What is a Conforming
Home Loan Anyway?
by Marc Hopkins

There has been a lot of talk lately about conforming loans, especially with groundbreaking new changes made in the loan limits. But what are they and why should people care?
A conforming loan means the mortgage meets specific, strict guidelines on loan limits, down payment or equity amounts, credit scores, and other criteria set by Fannie Mae and Freddie Mac. If the loan meets their guidelines then these two large investment groups will buy the loan, usually in groups of several thousand loans at a time, and then resell those loans to other investment groups. Due to the strict qualifying guidelines they are relatively low risk loans and are easy to buy and sell on the secondary market. This means banks and lenders can write these loans then sell them to others quickly, freeing up cash for them to go out and write even more loans. It keeps money available and flowing for housing.
Because the loan meets strict guidelines, is easy to sell, and carries low risk, the interest rates on these loans are usually lower than any other type of loan. While investors and banks win because they get low risk loans with a good return on their investment, homeowners benefit with lower rates and lower mortgage payments. The problem in some parts of the nation, including much of California, is few people can qualify for these loans because the conforming limit, or the highest amount the loan could be, was too low.
Every year Freddie Mac and Fannie Mae change the guidelines, adjusting for market conditions, inflation, and other factors. In January 2008 the conforming limit was $417,000. With the average sales price in California and other parts of the nation in excess of $600,000 few people could qualify for a conforming loan and were forced into an alternate loan program, usually at a higher interest rate. There were some homeowners who could qualify on price, but were limited by other factors such as credit or equity. So while brokers would try to get clients into a conforming loan whenever possible, it was difficult for many borrowers to qualify.
Recently this has changed. The Federal Government regulates and insures the loans going through Freddie Mac and Fannie Mae and some of the guidelines were determined by what the government would cover. As part of the Economic Stimulus package recently passed the government has agreed to temporarily increase the loan amount to $729,750. Many buyers and homeowners required to take a Jumbo or non-conforming loan can now qualify for a conforming loan.
It was expected that many homeowners could take advantage of this change to lower their rates or get out of adjustable rate loans they might not have been able to refinance otherwise. Additionally the thought was many potential buyers could now qualify to buy a home. It was hoped this new activity would boost the economy and get the money flowing through the real estate market again. Many people were eager for the change and excited when it was approved.
Unfortunately so far it has had little effect. Banks and lenders are not moving as quickly as hoped on the opportunity. Interest rates on loans above $417,000 have not gone down like it was expected. As a whole the mortgage lending market has been slow to respond to the change, and in some cases rates have even gone up. It is believed by many experts this is temporary and pressure from borrowers and government agencies will push the market into action. Once this happens the rates should adjust and there will be excellent opportunities for homebuyers and homeowners.
The current increase in the loan limit is temporary, though if it is successful there is hope it might be extended and potentially even made permanent. Either way, since the guidelines are tough, qualifying for conforming loans can be difficult. For those that can qualify they offer good rates and favorable terms. For investors they offer a low risk opportunity and keep money available to the lending industry. There are positives and negatives to every loan type, but for many people, especially with the new limits, conforming loans can be the best way to go.

~ Marc Hopkins is a licensed Mortgage Consultant and Notary Public at Brentwood Pacific Financial. He can be reached at 408-307-8242 or e-mail him at mhoppi@msn.com