The size of mortgages which are eligible for government backing is set to decline in October, 2011. The industry experts fear that this may negatively affect the mortgage market and lower the property prices even further.
Why was the mortgage cap increased?
The mortgage cap was increased as an emergency measure 3 years ago. The cap was raised to $729,750. This was the maximum loan amount which the federal agencies could guarantee. This made things easier and cheaper for borrowers as the government was guarantying that investors would receive payments on those home loans in case the homeowner was unable to make payments.
Why will the mortgage cap decrease now?
The mortgage cap is set to decline in various counties across the U.S. The main reason for this is that the government wants to reduce its presence in the mortgage market and create more ground for private investors.
What will be the new mortgage cap?
The new mortgage cap will vary from state to state. However, it will drop to $625,500 in top mortgage markets like Los Angeles, New York, and Washington, D.C.
How will it affect the mortgage market?
The new limits won't come into effect before October 1, 2011. However, some lenders have already warned the borrowers that they won't accept applications for loans that exceed the new limits.
Industry groups have commented that this is "the exact wrong way to go" as it will have a negative affect on the real estate market. But Obama administration officials want the limits to fall as scheduled. Apart from that, the Republican lawmakers have introduced measures to shrink the FHA's reach more aggressively. This has also urged them to lower the mortgage cap.
How will the homeowners cope with this situation?
If the homeowners don't qualify for a government-backed mortgage, as their mortgages are too big, then they will have to seek a jumbo loan. However, such mortgages often carry higher interest rates. Also, jumbo mortgage lenders will ask for larger down-payment requirements, sometimes even more than 20%. Apart from that, sellers will have to reduce their prices if borrowing costs rises.