Lenders Offering Larger Loans, Reuters, 10/15/04

By Aleksandrs Rozens

NEW YORK, Oct 15 (Reuters) - Some U.S. mortgage lenders are increasing the size of home loans they offer, anticipating changes in the way mortgage companies Fannie Mae and Freddie Mac will do business next year.

Higher loan sizes could boost volumes at mortgage banks, where profits have suffered from a significant drop in home loan refinancings. Changes may also marginally help the U.S. economy by encouraging more home buying.

"The more forward thinking lenders have already done this. It gives them a little competitive advantage in the near term," said Steve LaDue, head of Affiliated Mortgage in Wisconsin.

The move by mortgage banks to stretch loan limits comes as Freddie Mac and Fannie Mae, the country's mortgage agencies, endure regulatory scrutiny over accounting methods and face the possibility of tighter controls.

Neal Abromavage, a Deutsche Bank mortgage banking analyst, said the increase in loan limits partially reflects gains in home prices.

"It reflects how competitive the market can become once the refi wave begins to dissipate, and you begin to focus solely on purchase applications," Abromavage said. "The higher loan limits would enhance your ability to do so."

"They are trying anything to keep their volume up," said David Olson, head of Wholesale Access, an industry consulting group, who is skeptical about how much business higher loan limits will bring banks. "How do you keep volume up when rates go up? You cut prices (loan fees) or bring in new product."

INNER WORKINGS OF HOME LOANS

The mortgage loan universe is broadly divided into two types of home loans: jumbo mortgages for loans over $333,700 and conventional loans for mortgages of $333,700 and less.

Fannie Mae and Freddie Mac sell guarantees for conventional loans that allow mortgage banks to resell their mortgages.

Loans with a guarantee from the two U.S. housing agencies usually have a mortgage rate at least a quarter of a percentage point lower than a jumbo loan.

So, a borrower with a $330,000 home loan at a 6 percent fixed rate could see monthly borrowing costs drop to $1,926 from $1,979 a month, a savings of $636 a year.

This year, industry participants believe new loan limits -- the maximum size of a mortgage that can get Freddie and Fannie guarantees -- could be set at between $344,000 and $354,000.

Last year, the limit was increased to $333,700 from $322,700.

"Any borrower that falls within that category (conventional home loan) can now qualify for a lower cost loan," said Bob Moulton, chief executive of Americana Mortgage Group, in Manhasset, N.Y.

Loan limit changes may allow more home owners to refinance and shave off monthly borrowing costs. Or, they can get cash out of homes through cash-out refinancings.

Typically, changes to loan limits by Fannie Mae and Freddie Mac are announced in late November and take effect in January.

But some industry participants like James Nutter of James B. Nutter & Co. in Missouri cautioned against assuming that loan limits will be increased this year because of accounting problems at Fannie Mae.

"In the past they had to deal with Freddie Mac's news (of accounting problems)," said Douglas Duncan, chief economist at the Mortgage Bankers Association. "Now that they have to deal with Freddie and Fannie news they may be more cautious."