Conventional loan limit is a hurdle for high-end homes

— -- Some frustrated consumers are discovering that today's lower mortgage interest rates don't apply to buying or refinancing higher-priced homes, sparking calls for help from Congress.

Last year, Congress temporarily raised the loan limit for conventional mortgage financing to $729,750, but the limit dropped to $625,000 in December.

The cap means that loans for homes above $625,000 can't be sold to Freddie Mac and Fannie Mae. Lenders generally must hold those so-called jumbo loans, and with credit markets tight, they're more reluctant to make them.

When they do make those loans, borrowers are generally required to pay interest rates up to 2 percentage points above conventional rates. That's stalling both lending and refinancing activity in the higher-end market.

"You're looking at modest, middle-class homes. Why are they being punished? It's an issue of fairness," says Lawrence Yun, the National Association of Realtors' chief economist. "Given the historic 5% interest rates, who's going to be crazy to pay 6% or 7% while everyone else gets lower rates? The effect is that jumbo loans are tumbling."

The impact of the drop in maximum loan limits is acute in high-price housing markets such as San Francisco and New York, where the median home price is $600,000.

"Clients that have loan amounts that exceed Fannie Mae and Freddie Mac's guidelines are having an extremely difficult time getting loans," says Tony Petruzzella, managing director of Veritas Financial in San Francisco. "There are no lenders willing to do any 30-year notes above this loan limit of $625,000."

Housing industry leaders say the loan amounts eligible for conventional financing should be permanently raised to stimulate the housing market. Congress is considering raising the limit.

A potential beneficiary is Paul Jarratt in San Francisco. In September 2007, he bought his two-bedroom condo for a fixed rate of 6.375%. He wants to refinance, but because the amount he needs to borrow is above the jumbo-loan cap, he's unable to take advantage of lower rates available now.