Stimulus plan helps some homeowners

updated 8:40 a.m. ET Feb. 8, 2008

WASHINGTON - The biggest winners in the economic rescue plan now awaiting President Bush's signature are likely to be Americans with more expensive homes who will be able to refinance their home loans at cheaper rates.

For those who can take advantage of them, the bill's mortgage market provisions are likely to give more of a long-term financial boost than the tax rebates of $600 directed to individuals and $1,200 to couples, economists said.

The stimulus package temporarily raises the maximum size of mortgages that government-sponsored mortgage companies Fannie Mae and Freddie Mac can purchase and market as securities from $417,000 to as high as $729,750 in expensive parts of the country such as New York and California.

It makes a similar change for loans backed by the Federal Housing Administration, a government agency that insures loans to borrowers with poor credit.

As defaults have surged, investors have been extremely skittish about the U.S. mortgage market. With less money available to loan, banks are charging higher rates for riskier loans that can't be sold to Fannie and Freddie.

Right now, borrowers in expensive areas are "really stuck between a rock and a hard place," said Mark Vitner, senior economist with Wachovia Corp. Raising the caps, he said, will result in a refinancing boom for those properties.

"We're more likely to see an immediate improvement at the upper end than we are at the lower end" of the housing market, he said.

The interest-rate gap between "jumbo" loans above the $417,000 limit and "conforming" loans below it has been stubbornly high for months. Last week it was close to a full percentage point, compared with 0.2 percentage point in July, according to financial publisher HSH Associates.

While some critics say Fannie and Freddie should stick with financing loans on more affordable homes, Fannie Mae CEO Daniel Mudd said last week that over the past few years home prices rose so high in parts of the Northeast and West Coast, hiking the loan limits became necessary.

"The notion that we're talking about vacation homes in Colorado is not correct," Mudd said at an investor conference in New York. "We're talking about working-class homes."

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