Are We Asking The Wrong Home Question?

By MICHELLE SINGLETARY Washington Post Writer's Group

Published: Mar 2, 2008

Daniel H. Mudd knows the feeling a physician has when attending a party and a guest wants a diagnosis for some unexplained ailment.

In Mudd's case, people want to know about the housing market. Often they ask whether it's a good time to refinance their mortgage.

Mudd might be the go-to guy at parties because he heads the Federal National Mortgage Association, or Fannie Mae.

Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac) purchase mortgages from lenders. This in turn allows the lending institutions to provide more home loans.

Naturally, people think Mudd would know about the best time to get a mortgage because Fannie Mae is crucial to the mortgage industry.

But as Mudd points out, he's operating in the back end of the mortgage process after the loans have been originated.

"I'm not retail," he tells people.

Frequently, mortgage rates are the topic of conversation because many homeowners are desperate to know the best time to get out of loans they won't be able to afford once their teaser rates expire.

Of late, Mudd is fielding questions about a new law that has the potential to reduce interest rates for jumbo mortgage loans. He certainly was pressed about it during a lunch meeting recently at The Washington Post's offices.

First, Some Background

A jumbo loan is a mortgage that exceeds $417,000, which is the purchase limit for Fannie Mae and Freddie Mac. Loans of $417,000 and less are considered conforming because financial institutions can easily sell them to Fannie or Freddie.

Jumbo loans are needed for areas where home prices exceed that $417,000 limit, such as high-priced housing markets on the West Coast and East Coast. Because jumbo loans are not purchased by Fannie or Freddie, they typically carry higher interest rates.

In an effort to help reduce rates for borrowers needing jumbo loans, the recent economic stimulus bill included a provision to allow Fannie and Freddie to buy mortgages that exceed the $417,000 limit.

The new jumbo loan limits won't be the same for all areas. The limits will vary but can't be more than $729,750.

Many jumbo loan holders are eager to know whether rates will fall soon. However, Mudd wasn't sure many homeowners with jumbo loans would actually see lower rates in the near future.

"There will be some benefit," Mudd said. "How much? I don't know."

Mudd questioned whether investors would buy bundles of jumbo loans. Given the current mortgage crisis, investors might fear that these larger loans would be more risky, he said.

And with tighter lending standards, some borrowers won't qualify because their home values have dropped. Or they might not meet other stricter underwriting requirements.

Words Of Wisdom

Still, during our discussion about jumbo loans, I pushed Mudd to provide an idea of when jumbo loan borrowers might approach lenders to refinance.

"I don't know," he said.

Then Mudd added a very helpful tip. He said if you are worried about a 50-basis-point difference in your interest rate (that's a half-percentage point), you might be living in the wrong place.

If you have a jumbo mortgage and a half-percentage-point difference is going to mean a great deal to you financially - that is, it will free up money you need to pay for essentials - you're in too much house.

It means you are living above your means. Cornering mortgage professionals or other real estate experts at parties to press them for the best time to refinance your huge mortgage is nonsensical. You need to be asking when you should sell.