The official federal numbers aren't out yet -- and won't be released until after Thanksgiving. But some home mortgage lenders are jumping the gun and actively offering low-cost "conforming" loans in amounts far in excess of the mortgage size limits set annually by the nation's giant housing finance investors, Fannie Mae and Freddie Mac.

One lender, Quicken Loans, confirms that it has begun offering its best-rate pricing on "conforming" mortgages up to $290,000 --$15,000 higher than the official 2001 limit of $275,000 for purchases by Fannie and Freddie.

In mortgage industry parlance, "conforming" means that a loan follows all the guidelines necessary to make it eligible for purchase by Freddie or Fannie. Those two corporations dominate the market by purchasing billions of dollars worth of new home loans every month, thereby freeing up lenders' capital for additional mortgage originations.

Conforming loans generally carry the best-available rates in the marketplace at a given time. Non-conforming mortgages, by contrast, carry higher rates and less attractive terms. A non-conforming "jumbo" loan above $275,000, for example, often carries a rate 1/2 of a percentage point above rates on conforming loans of $275,000 or below. A non-conforming, 30-year jumbo might go for 7 1/4 percent in a market where conforming mortgages are priced at 6 3/4 percent.

One of the key eligibility criteria for conforming status is that the loan amount may not exceed the dollar limit set annually for purchases by the two big investors. The current limit of $275,000 took effect January 1, 2001, and governs Fannie and Freddie purchases through December 31, 2001.

Starting January 1, 2002, Fannie and Freddie will inaugurate a new limit, probably set somewhere in excess of $275,000. Exactly how much higher will depend on real estate statistics that haven't even been compiled yet -- the Federal Housing Finance Board's monthly survey of closed home sale prices for the month of October. That data will be collected at the end of this month from participating lenders, but the results are not scheduled for release until 8:30 a.m. on November 28.

If the October 2000-to-October 2001 year-to-year index of home purchase prices jumps by a specific percentage, Fannie and Freddie will be able to raise their conforming loan limits by that percentage. But no can predict today what that increase will be -- or if indeed there will be an increase -- since October home transactions will continue to occur through October 31.

Should the year-to-year October home sale price index jump by 5 percent, then as of January 1, 2002 the new conforming limit will increase by $13,750 to $288,750. If the index rises by 7 percent, the new conforming limit will go to $294,250.

But what happens if the rice index increases by only 3 percent -- in part because of a statistical anomaly caused by post-September 11 market aftershocks? Then the new limit for 2002 would only be $283,250. In a scenario like that, lenders offering $290,000 "conforming" interest rates and terms today with the expectation of selling their loans to Fannie or Freddie in January would be in for a jolt: Such loans would be ineligible for sale to either corporation, and the lender would almost certainly take a loss selling them elsewhere.

So how can a major online lender like Quicken Loans offer $290,000 "conforming" mortgages today? The company is clearly taking a calculated risk in order to capture market share and pull in "jumbo" borrowers who need loans just above the $275,000 limit.

A senior loan consultant for the firm claims that "we have the inside word" that the 2002 conforming limits will be above $290,000 "and maybe even above $300,000." A Quicken Loan applicant told RealtyTimes this week that a loan officer told him "we've got a special deal" with Fannie and Freddie, allowing advance use of the $290,000 limit.

A Freddie Mac spokeswoman emphatically denied that, and said the corporation itself has no advance knowledge of next year's conforming limits.

The moral here for mortgage borrowers? If you can get a jumbo loan at a "conforming" rate today, go for it. The risk that you're over the conforming loan size limit isn't yours. It's the lender's.

For more articles by Ken Harney, please press here.

Published: October 29, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.