Barring last-minute action by Congress, many Bay Area home shoppers will soon find it harder to buy more expensive homes because of changes in eligibility requirements for a popular type of mortgage.

Starting Oct. 1, interest rates on loans between $625,500 and $729,750 will increase, potentially raising monthly mortgage payments by hundreds of dollars.

Before the change, loans up to $729,750 qualified for a reduced interest rate.

Private lenders say they're ready to pick up the slack. But real estate professionals are afraid that higher interest rates and down payments will make buying a home more difficult at a time when the market is still weak.

"It's a big mistake," said Ken Rosen, chairman of Rosen Consulting Group, a real estate market research firm in Berkeley. "It's the right policy in the long run but the wrong time to do this. If there was one single smart person in Washington they would say we want to encourage lending at the bottom of the cycle. Let's get prices up 5 or 10 percent first."

The break for homebuyers and those looking to refinance in high-cost areas like Silicon Valley stemmed from emergency legislation passed by Congress during the 2008 credit crunch.

Shrinking limits

The law -- called the Housing and Economic Recovery Act -- raised the maximum amount permitted on mortgages that qualify for Fannie Mae, Freddie Mac and Federal Housing Administration programs. Those loans have the implied backing of the U.S. government, which lowered their interest rate.


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Now, under a complicated formula in the same legislation, five Bay Area counties will see the maximum drop from $729,750 to $625,500 on Oct. 1. Bigger loans will have to come from private lenders at interest rates that are about half to three-quarters of a percent higher.

The change would add $217 a month to a mortgage payment on a $725,000 loan if the Fannie and Freddie rate were 4.375 percent, when the private rate was 4.875 percent.

"While the interest rates are slightly higher, those are still extraordinarily good mortgage rates. They shouldn't affect buyers' ability to buy a home nor desire to buy a home," said Brad Blackwell, executive vice president and national sales manager for Wells Fargo Home Mortgage.

But Rosen predicted fewer people would be able to buy a home, although the lower limits won't hit the Silicon Valley as hard as other places because it has "just about the strongest housing market in the country." The East Bay has a much weaker housing market and will feel the impact more, he said.

The California Association of Realtors, which wants Congress to keep the higher maximum, says nearly 8 percent of home purchases in Santa Clara County could be affected; 11.5 percent in Contra Costa County; almost 10 percent in San Francisco; and about 6 percent in Alameda County.

"This change in policy would definitely have an impact at the worst possible time," said Robert Kleinhenz, deputy chief economist with the California Association of Realtors. He said the homeowner trying to trade up to a larger home will suffer.

Rep. John Campbell, R-Newport Beach, is co-sponsoring a bill that would extend the higher limits for two more years. Housing Secretary Shaun Donovan, however, said Thursday that lowering the limits was "the right step to take," and wouldn't have a big impact on the housing market.

Median price factor

Mortgage brokers and real estate agents say some customers are racing to beat the deadline.

"I am seeing people kind of rush to get in there," said Andrew Soss, president of the California Association of Mortgage Professionals of Silicon Valley.

Bank of America has already stopped accepting applications for the high-limit loans out of concern that they won't be completed before the deadline.

The limits are based on median home prices, and in some counties median prices have dropped substantially. Monterey loses more than any other county in the United States: $246,800. Its former limit of $729,750 is being ratcheted down to $482,950 because of declines in home values in the southern, agricultural part of the county.

"It's a ridiculously huge drop, and a ridiculous equation they are using to formulate this," said Stuart Shankle, broker at Shankle Real Estate in Monterey. "It's going to leave a tremendous void in the market."

Mortgage bankers downplay the impact and say they're ready for the business the new limits will bring to their doors.

"We view it as more of a little blip," said Buck Hawkins, vice president of the California Mortgage Bankers Association. "Most of us in the industry suspect the private money will come into that space and compete. It won't be a subsidized rate. It will be a market rate, about three-eighths to three-fourths basis points higher," he said.

Matthew Ostrander, a California Mortgage Bankers Association director and co-founder of Parkside Lending in San Francisco, expects any impact to be temporary.

"The Bay Area is going to do OK," he said.

Contact Pete Carey at 408-920-5419.