Realty Check

GSE Loan Limit Exceptions: Are They Really Fair?


I was waiting to see who did it first. I figured it was between California and Florida, and I was right. California wins. Last Thursday, Gov. Arnold Schwarzenegger wrote a letter to Congressional leaders asking for a state exception to the GSE conforming loan limit ($417,000). That's the upper loan limit at which Fannie Mae and Freddie Mac can buy said loan.

I bet a lot of folks don’t know this, but there are already a little more than a few states that are excepted from the rule: Alaska, Hawaii, the U.S. Virgin Islands, and Guam. The maximum amounts for these states are 50% higher than the limits for the rest of the country, according to Fannie Mae.

The reason for those states getting an exception to the rule is that their home prices are completely out of whack to affordability. And that is now the argument Gov. Schwarzenegger is making:

“The current GSE conforming loan limit for lenders willing to originate conforming mortgage loans for median-priced homes in California is $417,000; however, according to the California Association of Realtors, the median price of a single family residence in July was $586,030. Again, this disparity makes these products practically irrelevant in California,” Gov. Schwarzenegger writes in the letter to Congress.

Makes sense, right? Only now I’m thinking about that whole ‘cause and effect’ conundrum. Back in the 1970s, when Congress decided to make these particular exceptions, it was all about the price of real estate in some wacky spots. Clearly a fisherman in Alaska shouldn’t have to pay more out of pocket than a fisherman in Maine, just because homes in Alaska cost so much more, right?

So now we come to the California conundrum. I mean, homes in Alaska were likely so high-priced because there just weren’t that many of them, and, not that I really know the answer, but I’m guessing that it just cost a lot more to build and maintain a home in Alaska than anywhere else. Tourism in Hawaii likely drove the prices out of whack there as well. Not too sure about Guam.

Now the House of Representatives passed a bill on May 22 of this year that would raise GSE loan limits for single family homes to either the median cost in the area or 150% of the current limit, whichever was lower. Then the chairman of the committee that passed it, Rep. Barney Frank, in August, urged the Senate to raise that limit beyond what his own committee had done. This all thanks to the credit crunch in august. “In the current housing crisis, it is clear that we must immediately provide additional mortgage liquidity in all areas of the country, including high cost areas,” Frank wrote in the committee press release. The Senate’s still thinking about it, but that would open the door for California.

Still, when I think about California, I think about a state chock full of homes, chock full of new construction, and chock full of investors who wanted to make a few bucks off of all of that. I think of massive condo complexes and borrowers who took advantage of the easy cash afforded them by unscrupulous or heady lenders. Yes, no question, affordability in California is now out of whack. But when you think about the average California homeowner and you think about the average Alaskan homeowner, are you really seeing the same guy/gal?

Questions?  Comments?