Fannie Mae and Freddie Mac just announced loan limits for 2011, and they have remained unchanged from 2010. Each year Congress will analyze average home prices from across the nation and adjust the loan size as needed. Ever since I first got in the mortgage business in 1986, the loan limits would mostly increase each year. But this time they are staying the same, as they have done in many recent years.

Below is an interesting history of the Conventional, Conforming loan limit, going back to my first year in the mortgage industry:

1986 133,250
1987 153,100
1988 168,700
1989 187,600
1990 187,450
1991 191,250
1992 202,300
1993 203,150
1994 203,150
1995 203,150
1996 207,000
1997 214,600
1998 227,150
1999 240,000
2000 252,700
2001 275,000
2002 300,700
2003 322,700
2004 333,700
2005 359,650
2006 417,000
2007 417,000
2008 417,000 2008**HB 729,750
2009 417,000 2009**HB 729,750
2010 417,000 2010**HB 729,750
2011 417,000 2011**HB 729,750

It is interesting that the only time the loan limit dropped was from 1989 to 1990, during that period's recession. And we have had a major recession from 2008 to date, and the loan limit has held and not dropped.

Not only has the loan limit not dropped, in 2008 Congress created the High Balance (**HB) Conforming loan, which allows for a low rate for "Conforming" loans between $417,001 to $729,750. These loans sizes would normally be called a Jumbo loan and be charged a higher rate, but thanks to this new class of loan they are now a High Balance, aka Conforming-Jumbo, aka Conforming "Plus". So effectively, starting in 2008 the loan limit increased, massively! It is good news for homebuyers and refinance borrowers in this loan size range, but are the rest of the taxpayers absorbing massive risk at a time they do not need to be? Fannie Mae and Freddie Mac are beyond broke, yet Congress saw fit to increase the risk, on the backs of the taxpayer.

I wonder what would happen if the political geniuses decide to privatize FNMA and FHLMC? Or will Congress decide taxpayers should continue to subsidize mortgage borrowers? Interesting times. I don't think the public quite realizes the dire straits the mortgage industry is in, and the literal lifeline it is on thanks to the U.S. Government. Whenever government starts to meddle, there is always fireworks, usually bad choices, and ultimately something that needs to be fixed down the line. Let's hope they get this one right, home ownership is too important to the economy.

Buy FANNIE MAE FORECLOSURES using the HomePath Program, visit: http://www.homepath.com for property listings.

Owner Occupied loans to 97% LTV

3% down can come from gift money.

Second Homes available to 90% LTV with 700 credit score.

Investment property available to 85% LTV with 700 score.

Property must be listed on http://www.homepath.com.

Gift funds allowed on Owner Occupied Homes & Second Homes.

NO APPRAISAL (automated review only- must be within 10% of sales price).

Home inspection required (only to show home meets Safety & Health codes).

High Balance loans (loans as high as $729,750) available with higher credit score requirements.

Eligible Properties: single family & condo only.

First time home buyers allowed.

Minimum 660 credit score.

6% seller contributions towards closing costs.

No PMI.

It does not get much better than this, in the way of liberal loan programs!

Have you heard a mortgage lender or Realtor talk about a “declining markets policy” lately? A declining markets policy is a policy by a bank or private mortgage insurance (PMI) company, which says that in a real estate market with declining values, you cannot get maximum loan-to-value (LTV) financing on a Conventional loan. Most banks and PMI companies have defined all of DC, different parts of MD and most of Northern Virginia as declining markets.

The mechanics of this means you have to put an extra 5% down payment down in some situations, on a Conventional loan.

On Conventional loans up to $417,000 (called Conventional Conforming loans) you used to be able to borrow up to 95% LTV and put 5% down payment down. In a declining market, you now have to put 10% down payment down.

On Conventional loans up from $417,001 to $729,250 (called Jumbo Conforming loans or Conforming Extended loans) you used to be able to borrow up to 90% LTV and put 10% down payment down. In a declining market, you now have to put 15% down payment down.

One answer to avoiding these increased down payments on Conventional loans is to instead get an FHA loan. However, FHA loans come with much higher PMI costs. However, if you want to avoid having to come up with a larger down payment, FHA is the answer. See below for an example:

Conventional loan
$500,000 sales price home
95% loan = $482,500 loan amount
PMI up front cost = $0
PMI monthly cost = $308
PMI cost over 4 years = $14,784

FHA loan
$500,000 sales price home
96.5% loan = $475,000 loan amount
PMI up front cost = $8,443 (which is financed into the loan typically)
PMI monthly cost = $221
PMI cost over 4 years = $19,051

And you may have heard that Fannie Mae scrapped their "declining markets" policy that required loan underwriters to boost minimum down-payment requirements by 5 percent in areas where home prices are falling or difficult to determine. But that does not mean that some banks have not kept the policy, and all PMI companies have certainly kept this policy in tact. So the problem is still with us.

And the larger down payments caused by these declining markets policies are no small event. With housing prices where they are in the DC Metro area, another 5% down stings, especially in an economic climate where we are all watching what we spend. See the below for a table of median home prices in DC:

Median prices for DC homes
2005 median price was 489k
2006 median price was 499k
2007 median price was 529k
2008 median price was 500k
2009 median price was 427k

Median prices for DC condos/coops
2005 median price was 375k
2006 median price was 354k
2007 median price was 350k
2008 median price was 360k
2009 median price was 360k
(data from www.gcaar.com)

If you are buying the median home in DC in 2009, another 5% down payment means another $21,350. I have seen these declining markets policies in the past, and they do not last forever. But while they are with us, homebuyers should be aware of them, consider FHA loans, and go over the numbers and all costs carefully with a recommended mortgage broker or bank.