Mortgage insurance limit back to '08 level

Starting Saturday, the federal government's mortgage insurance limit will fall back to early 2008 levels, just as the "jumbo loan" market shows signs of recovering.

Federal insurance reduces the risk of investing in mortgages, allowing banks to more easily sell the loans on Wall Street, thus freeing up lenders' capital so they can lend again.

The government will now insure mortgages up to $625,000 on Long Island and in other high-cost areas, down from $729,500.

Loans larger than the federal insurance limit are called "jumbo loans" and often carry higher interest rates and down payment requirements than "conforming" loans, which are insured. Some lawmakers and real estate observers warned home prices could fall after the limit is reduced.

But record-low interest rates have been helping the jumbo market recover, lenders said.

This week, the average rate for 30-year fixed mortgages hit another low at 4.01 percent; jumbo rates are usually half a percent more.

Jumbo mortgage applications on Long Island have jumped 75 percent in the past two months, said John Walsh, president of Connecticut-based Total Mortgage.

He said at least eight in 10 are refinancings: "Don't forget -- nobody's refinanced jumbo mortgages in a long time."

Astoria Federal Savings, which approves an average of $3 billion in jumbo loans a year, lost $2.2 billion in total assets last year, in large part because the higher federal insurance limit cut down the number of jumbo loans.

Monte Redman, president and chief executive, expects an uptick in his jumbo business and sees no need for the return of higher federal insurance limits: "It makes no sense for taxpayers to continue to subsidize million-dollar homeowners this way."