Prepayment Update - March '08

The Conforming Loan Limit Increase:
What it Means for Borrowers and Investors
by Dan Szakallas

There has been much discussion over the last couple months regarding the increase in the conforming loan limits as part of the 2008 Economic Stimulus bill that eventually passed through the House and Senate and was signed into law by President Bush on February 13th. There was much speculation on what the new limit would be, how different parts of the country would be affected, and ultimately when it would go into effect. Now that the law has been passed, we can answer those questions and discuss what the impact might be on the Agency MBS arena.

The increase in the conforming loan limit for 2008 is defined as the lesser of $729,750 or 125% of the average home value within a given metropolitan statistical area (MSA). The increase has been introduced as temporary, but there is no timetable for a reduction. Fannie Mae and Freddie Mac are now allowed to purchase these loans for securitization into their mortgage-backed security pools that are sold to investors. Fannie Mae will only securitize these loans with other similar loans, meaning they will most likely receive their own pool type, and not be packaged into standard FNCL TBA deals.

From the borrower’s perspective, this change greatly benefits those in top MSA areas, such as New York, Chicago, Los Angeles, etc., where the median home price can fall above that of the former conforming limit of $417,000. For example, according to HousingTracker.net, the median asking price for a single family or condominium home in the NY-White Plains-Wayne metropolitan division of the NY-NJ-Long Island MSA was $435,000. With the expanded limit, potential buyers in this market can now qualify for an interest rate on a mortgage that should be less than before, when they could only qualify for a jumbo mortgage. The typical spread between conforming and jumbo loans has historically been around