"Conforming" vs "Non-Conforming"

In order to understand what conforming and non conforming means you must first have an understanding of the secondary mortgage market. The secondary markets provides liquidity to lenders to make loans by purchasing mortgages from originators thereby replenishing thier credit lines and giving the lenders the continued ability to originate new loans.


So what does it mean when you hear "conforming" and "non-conforming?" A "conforming" loan simply means it’s a loan that meets Fannie Mae and/or Freddie Mac guidelines. For instance, a "conforming" loan maximum limit currently is $417,000, anything larger than this limit is considered "non-conforming" or "jumbo." Another example would be borrowers who acquire loans exceeding 80% LTV (loan to value) are required to carry private mortgage insurance. The guidelines set forth by Fannie Mae and Freddie Mac in the Conforming market defines the risk that these secondary market investors are willing to take for their products. When you walk into a Washington Mutual, Wells Fargo, Bank of America or Chase and you see them advertise 30 or 15 year mortgage rate, those rates are Fannie and Freddie Conforming loan rates for a 30 year or 15 year fixed with an 80% LTV ratio and full documentation of income and assets. In short, a "conforming" loan is one that meets the requirement to be purchased by Fannie Mae or Freddie Mac on the secondary market.



FYI...LTV mean Loan to Value ratio or the ratio of the loan size versus the value of the home/collateral.

Bush Stimulus To The Rescue!

Could it be our noble leader has actually done something that may benefit the American people and their pursuit of the "American Dream?" Forget about the $600 to everyone and $1200 to married couples (which if my math serves me correctly is the samething) the revision to Fannie Mae and Freddie Mac loan limits to me is the among the most important parts of the stimulus package.

The economic stimulus package includes a very important change to our conforming loan market that may be the key to putting a bottom into this runaway stage coach. The package includes and upgrade to the conforming loan limits which will change the conforming loan limit from $417k to $700k. This may not mean much to the average homeowner but in terms of options to help struggling homeowners this is huge. The Jumbo non-conforming market is all but dead as with the Alt-A and subprime markets that catered to the newly included loan sizes and represent a serious hole in the Florida and national loan markets. If Fannie Mae and Freddie Mac can truly fill the void, in the markets in that loan bracket, some of the most underpressure upper middle class foreclosure may indeed be averted by these homeowners finally having an option. This will in turn lead to a decelaration in falling home prices and help us put in a bottom.

FED Rate Cut....Guilt By Association

Many people associate a FED interest rate cut with automatically lower interest rates in mortgages this is a misconception. The interest rates on conforming mortgage products are determined by the the underlying bonds and their yeilds. The best gauge the public has to really track the directionality of mortgage interest rates comes from the 10 year BOND yield.