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For millions of homeowners, the bursting of the housing bubble seems like a never-ending nightmare. But in just another month, a new chapter of that saga may begin for homeowners and potential buyers in high-priced real estate markets.
The latest bad news for housing comes from the federal government, which is reducing the size of mortgage loans that are eligible for government guarantees. Although everyone knew the move would come eventually, hopes that the market would already have recovered by the time limits moved back down have proven overly optimistic.
Make it a jumbo
In 2008, Congress temporarily raised the upper limit on government-backed loans to $729,750. That allowed Fannie Mae, Freddie Mac, and the Federal Housing Administration to cover homes in many high-priced areas where the former limits were inadequate.
But on Oct. 1, the limit will drop back to $625,500. If you live in an average real estate market, that may not sound like a huge hardship, as it may cover only the most expensive homes in your area. But in the highest-cost areas of the country, that limit isn't nearly as extravagant as it sounds -- and the move will force many would-be homebuyers to turn to the more expensive jumbo mortgage market to get financing. And with many banks taking 30 days to process and fund new mortgages, that effectively means that time has just about run out to take advantage of the higher limits.
Harder to buy
What makes jumbo treatment so bad? During the financial crisis, the market for jumbo financing came to a standstill as lenders wanted the security of federal guarantees. Since then, lenders such as JPMorgan Chase (NYSE: JPM ) and Citigroup (NYSE: C ) have gone back to embracing the jumbo market. According to Moody's, Wells Fargo (NYSE: WFC ) and Bank of America (NYSE: BAC ) are now the largest jumbo loan producers, with JPMorgan and Citi also having a major role.
Moreover, even rock-bottom rates on mortgages haven't broken the logjam in housing. Mortgage applications fell to a 15-year low last week, as fears about the economy and high unemployment rates made potential buyers less confident about their ability to handle big-ticket purchases. Adding another hurdle by throwing more buyers into jumbo status certainly won't solve any problems.
Finally, jumbo loans tend to cost more than regular mortgages. An extra half or full percentage point may not seem like a big deal, but over the course of 30 years on a huge principal balance, the difference can add up to tens of thousands of dollars in extra interest.
Less danger of illiquidity
Things don't look as bad as they did three years ago, though. That's largely because once-shunned mortgage securities are now among the hottest investments -- not as direct investments, but rather through mortgage REITs.
Investor interest in mortgage real estate investment trusts has never been higher. Given the huge yields that mREITs pay, that's not surprising -- but it does mean that mREITs need a steady supply of mortgage-backed securities.
The move in jumbo mortgages could result in a shift, though. Since government agencies can't guarantee jumbo loans, mREITs such as Annaly Capital (NYSE: NLY ) and American Capital Agency (Nasdaq: AGNC ) that focus primarily on agency-backed securities will lose some supply. That in turn will expand what's available to other mREITs like Chimera Investment (NYSE: CIM ) , which goes beyond agency securities in search of better returns.
What's crucial, though, is that mortgages continue to flow through the system. If the lowering of the jumbo threshold restricts that flow, then even the support from mortgage REITs won't necessarily be enough to offset the problems the lower limits cause.
As tough as the housing market has been in the past several years, it seems like new obstacles keep coming up. With the new lower jumbo-loan limits approaching, it may be a matter of time before some broad new initiative attempts to tackle the fundamental question of making today's low mortgage rates available to anyone who wants to refinance. Until that happens, homeowners may have to keep waiting for a home-price recovery.
Whether you're buying, selling, or just looking for a better deal on your mortgage, check out the Fool's Home Center and get the information you need today.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.