U.S. housing market suffers another blow this past weekend

October 03, 2011 09:40AM

Already on life support, the housing market endured another body blow this weekend when the cap on mortgages eligible for federal loans was reduced. Only loans of $625,500 or less, compared to the previous limit of $729,750 for the country’s most expensive markets, will be eligible for the lower down payments and interest rates promised by government loans.
Those jumbo loans that exceed the limit will become more expensive.

Just 2 to 4 percent of the market will be impacted by the change, according to CNN, or about $30 billion of the $600 billion worth of loans Fannie Mae and Freddie Mac acquired in 2010. But with home prices continuing to plummet and private lending still tight, experts wonder why the government is taking any step that could further weaken housing. Rates for those loans, which will undoubtedly be harder to secure without government help, could rise by as much as 0.5 percentage point.

The move is part of an effort to slowly remove the federal government from the mortgage market. It will give private banks an opportunity to capitalize on the higher yielding jumbo loan market — if they’ll loosen their purse strings and lend. [Reuters] and [CNN]