As the housing market and lending markets continue to crater, the government devised a tentative economic stimulus package announced last Thursday. The package would allow Fannie Mae and Freddie Mac to buy mortgages as much as 75 percent higher than the current $417,000 limit. Initially, this seemed like a good move to me, because it would mean more borrowers could get lower rates when buying or refinancing.
But some very smart readers disagreed with my post, and one pointed out the flaws in this approach. Here’s what he said (trimmed just a tad for space):
What they don’t seem to understand is that the people in real trouble cannot qualify to refinance using these conforming loans due to much tighter qualifying restrictions and a maximum 80% loan-to-value ratio (i.e. 20% down payment for purchase or 20% equity for refi). The ones in trouble purchased in the last 12-18 months and put little to zero down to begin with. Even if they put 15-20% down, they definitely have less than that in equity now anyway, so there is no refinance option for them with conforming.
Of the people who are looking to buy their first home or who have been waiting on the sidelines to get back in the game, most are not looking to, or are unable to, put 20% down. … And don’t forget conforming loans carry much tighter restrictions than non-conforming loans….”
I’m completely in agreement with this reader’s comment as far as Problem 1. I do quibble with Problem 2, because I do think there are people who can put 20 percent down.