Amid growing concerns about the economy, the U.S. House of Representatives approved a bipartisan 146 billion economic stimulus plan targeted to avert an economic trough. The plan was the Bush Administration’s way of tackling the ensuing softening of the economy in all spheres. In addition to providing tax rebates to about one-third of Americans, the plan calls for injecting vigor into the real estate housing and home loan mortgage markets.
The Representatives voted 385-35 to approve the stimulus legislation that would provide more tax breaks for businesses and inject capital into the softening mortgage loan market. The plan will permit Fannie Mae and Freddie Mac to purchase jumbo loans which are currently not permissible.
At present, Fannie Mae or Freddie Mac cannot buy mortgage loans in excess of $417,000 which are classified as jumbo loans. The new plan increases the limit to $625,000, meaning homebuyers who were once eligible for lower interest rates will get them now. Jumbo loans come with higher interest rates because it is more complex to sell the bundled mortgages by mortgage lenders on the secondary market. Hence, the cost of doing business by mortgage lenders in jumbo loans is passed on to loan borrowers in the form of higher interest rates.
Also, jumbo loan are more difficult to qualify for. Herein, if the plan is signed into law, once ineligible homebuyers of home loans in the amount of $417,000 to $625,000 will have access to easier home loan financing and lower mortgage rates.
This theoretically could provide the much needed impetus to the mortgage and housing real estate markets. The plan hopes to make mortgage refinancing easier which could translate into lower foreclosures. By lifting the maximum dollar limit on home loans from the current $417,000 to a new cap of $625,000 makes these mortgages eligible for purchase by Fannie Mae and Freddie Mac thus, provide a new boost to the housing market
However, the new cap of $625,000 is only a temporary measure that will be in place for twelve months. The lawmakers hope the twelve month time limit will give current homeowners an incentive to perform home mortgage refinancing. Due to lowering of interest rates mortgage refinancing has been on the rise since November of last year.
According to the Mortgage Bankers Association (MBA), mortgage application volume rose by 8.3 percent. The MBA application volume index leapt from 906.4 to 981.5. Again, the sharp jump was mainly due to mortgage refinancing by consumers. President Bush and Congress hope the stimulus package will provide a similar boost to the economy.