New home loan cap falling short

New loans are trickling out that cut borrowing costs for larger Sonoma County home mortgages, but the savings fall short of expectations, potentially limiting any boost to the stagnant housing market, lenders said.

Borrowers continue to pay higher interest rates for loans above $417,000, the old cap on loans backed by the government. It can also be difficult to qualify for the new loans created by the federal economic stimulus package, which temporarily provides government backing for loans up to $662,500.

"It will help a little bit probably, but not a ton, as we were hoping. It's not going to solve the housing problem," said Alison Fetherolf, vice president for the Santa Rosa office of Sterns Lending, which funds mortgages.

Lenders are beginning to make the new loans available after the Federal Housing Administration and national mortgage agencies Freddie Mac and Fannie Mae temporarily raised limits on loans they purchase. The new cap, available through the end of the year, is 125 percent of Sonoma County's median home price as set by federal housing authorities.

Increasing the so-called conforming loan limit is designed to reduce the cost of buying a home in Sonoma County and other regions with high housing costs. By raising the caps temporarily, many borrowers will no longer need jumbo loans, which cost more than conforming loans. Investors on the secondary market consider jumbo loans more risky because they don't have federal backing.

But loans up to $662,500 in Sonoma County still carry higher interest rates -- as much as a full percentage point -- than loans under $417,000, lenders said.

Rising interest rates may dull the impact of the new loans. Mortgage rates have moved higher for more than a month due to concerns over the housing market and rising inflation.

"A loan at 7 percent is not going to help the housing market," said Scott Dovala, branch manager for Ascent Home Loans, which funds mortgages.

On Monday, for instance, one lender charged 6.125 percent interest on loans up to $417,000, but 7.125 percent on those up to $662,500. For even larger loans, the lender charged 8.125 percent.

While that middle tier is less expensive than the jumbo rate, the pricing still reflects a risk premium because of the large loan amount.

"The lenders are all afraid no one is going to buy them. That's the whole problem. That's why the regular jumbo picture is so ugly," said Kris Anderson, a mortgage broker for Allstate Mortgage Company, in Santa Rosa.

Lenders stung by soaring foreclosures are requiring borrowers to meet tough standards to qualify for all loans, including the new mortgages.

Fannie Mae, for instance, requires a 700 credit score if the borrower's down payment is less than 20 percent of the purchase price. FHA charges higher interest rates for lower credit scores.

"Will borrowers be able to save money by refinancing? Sure they will. But realistically, they will not save as much as they currently think," Dovala said.

Fannie Mae also won't allow homeowners to refinance a first and second mortgage into a single loan.

"It's pretty huge. A lot of people have first and second mortgages," Fetherolf said. "If Fannie Mae isn't allowing us to pay off the second, then it really doesn't do us any good."

The pricing might improve if investors show an appetite for mortgages under the new temporary loan limit.

"Every lender is different with their pricing. We're not finding any consistency on pricing with these yet," Anderson said.

Lenders will begin to gauge investor demand for the new loans after April 1, which is when the national mortgage companies can start buying them, Fetherolf said.

You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.