WASHINGTON -- The stars may be aligning for a handful of quick-acting upper-income borrowers to take advantage of a once-in-a-lifetime opportunity to obtain jumbo mortgages at conforming loan rates.

In anticipation of a Jan. 1 hike in the ceiling on loans that can be financed through mortgage giants Fannie Mae and Freddie Mac, some lenders are already quoting rock-bottom rates on mortgages they expect to sell to the two secondary market investors.

But because a key federal survey indicates housing price increases have slowed dramatically since the summer, it now look as though some early-bird lenders may have gone too high too soon. And borrowers who move fast can cut their monthly costs substantially.

"I'd definitely grab it," Keith Gumbinger of HSH Association, a Butler, N.J. mortgage information service, said of the rare chance to cash in on a lender's misjudgment.

Conforming loans are Grade A mortgages which meet the underwriting standards of Fannie Mae and Freddie Mac, the two government-chartered financial institutions which were created to keep money flowing into the mortgage market.

They do that by buying loans from local lenders, packaging them into securities and selling them to investors worldwide.

Because Fannie and Freddie's rules are the strictest in the market, and because it is a common belief among investors that their securities are backed by the full faith and credit of the U.S. government, conforming loan rates are the lowest available.

At any given time, conforming loans are priced anywhere from 0.25 to 0.75 percent below jumbo loans, which are mortgages that exceed the government-set limit on Fannie-Freddie mortgages.

The current ceiling is $322,700, an increase of 7.3 percent from $300,700 in 2002. And because the two government-sponsored enterprises almost always increase the limit on Jan. 1 -- they haven't done so only once -- some lenders already are offering their very best rates on loans of up to $340,000.

On a 30-year, $340,000 mortgage, the difference in the monthly payment for principal and interest for a conforming loan at 6 percent and a jumbo loan at 6.5 percent is $111 -- $2,038 vs. $2,149.

As recently as August, another big jump in the Fannie-Freddie ceiling looked like a sure thing. But in September, the index on which increases in the conforming limit is based dipped considerably. And if the trend continues for another 30 days, lenders who jumped the gun will be caught with their pants down.

Changes in the limit are based on the increase in house prices from one October to the next as calculated by the Federal Housing Finance Board. The average for this October won't be announced until just before Thanksgiving. But in October 2002, the average was $235,700.

In August, the average price was $253,900, the highest it's ever been and setting up the possibility of another big boost in the conforming loan limit. But in September, the average took an unexpected dive, falling to $237,900.That's only $300 more than it was in September 2002, and just $2,200 above the October 2002 average of $235,700.

At those numbers, a much larger loan limit for 2004 is now questionable at best.

Frank Nothaft, Freddie Mac's chief economist, would not speculate on what the loan ceiling might be next year. But he questioned the accuracy of the September downturn, "especially when all the other measures show that prices are rising at a healthy clip" across the country.

HSH's Gumbinger also thinks the government average for September could be an aberration. "I don't know of too many sellers in a hurry to reduce their prices right now," he said.

The mortgage analyst believes the average for October "should be back in line" with August. "We are currently estimating about a 7.5 percent increase in the limit," he said.

But he conceded that if the downward trend continues, it "would probably upset a lot of apple carts."

Indeed, if the change was based on average prices in September instead of October, the increase in the limit would be a measly 0.01 percent, resulting in a minuscule $323 jump in the ceiling to about $323,6000.

That would be the smallest increase ever in the ceiling except, perhaps, for the year in which average prices fell and Fannie Mae and Freddie Mac, claiming they are required to raise their limits but not lower them, held fast for 12 more months.

If the change was based on the movement in the average from last October to this September, the increase would be a somewhat larger 1 percent, or $3,227, boosting the ceiling to about $326,000. But again, that falls far short of recent increases in the limit and the ceiling some lenders are currently quoting.

If lenders cannot sell their loans to Fannie or Freddie, they would either have to hold them in portfolio or sell them to other investors who wouldn't pay as much. But either way, lenders, not borrowers, would be forced to eat the difference.

"As every lender knows," says Freddie Mac's Nothaft, "the decision to offer conforming rates for loans above the statutory limit carries some risk."

Published: November 5, 2003

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.