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."
Still, borrowers with little equity in their homes whose property value has plummeted could still could face foreclosure if they can't make their mortgage payments. And the new limits are due to expire by year-end unless Congress makes the changes permanent.
The law also prevents Fannie and Freddie from buying loans over the $417,000 limit made before July 1, 2007. But that provision would still let borrowers with older loans refinance into new loans that would be sold to Fannie and Freddie, because those loans would be considered new loans.
Groups representing Realtors, bankers and home builders, which have been hit hard by the mortgage market downturn, have been lobbying hard for increases in the Fannie and Freddie limits.
Still, the impact of the changes is likely to take several months to be felt in the mortgage market, said Doug Duncan, chief economist at the Mortgage Bankers Association. Investors are still working out whether loans above $417,000 will be packaged together as securities with loans below that level, or treated separately.
Also, Duncan said, investors will want to study default levels on loans above $417,000, and prices could reflect a higher level of risk until that is known. "Investors will have to see how those securities perform relative to others," he said.
The impact of the Federal Housing Administration change is likely to be smaller. The Congressional Budget Office estimated the agency could back $10 billion in additional loan guarantees through 2008 with higher limits _ a tiny fraction of the more than $2 trillion in new mortgage loans made last year.
While economists call these changes positive, they aren't a quick fix for the housing industry's problems. Home prices are still falling, lenders have become more cautious about extending credit and investors worldwide are still leery of the U.S. mortgage market amid soaring losses on mortgage-linked investments.
"Congress and the President want to show that they're doing something about housing," said Nariman Behravesh, chief economist at forecasting firm Global Insight. However, especially in the short-term, he said, "the overall effect of this, we think, is going to be fairly small."