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Fannie & Freddie's Mortgage Backing Capacity Increases

JPM WFC BAC

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The Federal Housing Finance Agency (FHFA) announced that the maximum limit for the mortgage loans backed by Fannie Mae and Freddie Mac will be $424,100 for most part of the U.S. in 2017. Further, it said that much higher limits will be in effect in the higher-cost areas.

This figure marks an increase of approximately 1.7% from the baseline loan limit of $417,000, which was established by The Housing and Economic Recovery Act of 2008. Since 2006, this limit had never been increased by FHFA.

Moreover, this first-time change in loan limits comes after the average U.S. home prices witnessed a record high in the third quarter of 2016, as it surpassed its pre-decline level in the third quarter of 2007.

Further, with this change, various first-time homebuyers will find it easier and cheaper to enter the market as credit requirements and down payment for such government-backed mortgages are generally looser than most of the jumbo loans.

Sometimes jumbo mortgages carry interest rates that are higher than government-backed loans. Also, they carry steeper requirements from lenders which include higher credit scores and 15–20% of down payment. However, of late, the trend has changed a bit as banks like Bank of America Corporation (BAC - Free Report) , Wells Fargo & Company (WFC - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) planned to relax the prerequisites for jumbo mortgages.

Various first-time homebuyers who have a decent income, are not able to enter the market because they can’t pay more than 3% for a down payment and the houses that they want to purchase are too expensive to be backed by the government, said Phil Ganz, a loan officer with Fairway Mortgage.

He further added, “When you raise the limits, it’s about giving young, successful people the chance to get in the game.”

Ken Fears, director of housing finance and regional economics for the National Association of Realtors said that this increase in the so-called conforming loan limits “reflects that health is finally returning to the market.”

Thus, it can be concluded that this change, which has taken place almost after a decade, will change the definition of jumbo loans.

Of the banks mentioned above, Bank of America carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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