Realty Check

Lower Loan Limits: Let the Games Begin

The summer has barely started, but the fight is on against changes to loan limits that don't take place until the first of October.

Tom Grill | Photographer's Choice RF | Getty Images

Today the National Association of Home Builders released its own studyclaiming that lowering the loan limits at Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), "will reduce housing demand and place downward pressure on home prices in major housing markets."

The loan limits were raised when the mortgage market crashed, investors in mortgage backed securities ran for the hills, and the government-owned entities were the only ones left writing mortgages. Originally at $417,000 for a so-called "conforming loan," they rose to as high as $729,000 in the nation's higher-cost markets, in order to keep mortgages moving. That will drop to $625,000 in October in those markets, with the base limit remaining at $417,000.

The builders say that homes above those limits "would likely require financing with higher mortgage interest rates and other less favorable loan terms, such as higher required down payments and more stringent credit history thresholds."

So how many homes does that affect? According to the builders, 3.63 million owner-occupied homes now fall outside the loan limits, given their current values and an estimated 10 percent down payment (these homes aren't necessarily for sale). This is out of a total housing stock of 75 million U.S. homes. Lower the loan limit to $625,000, and the builders say you add 1.38 million homes to that group outside of the GSE/FHA eligibility.

I spoke with one of their number crunchers and suggested that out of 75 million homes, that's really kind of a drop in the bucket...barely 2 percent, and again, those homes aren't necessarily even on the market. He argued that the national number doesn't represent many big markets, like here in DC where it would be 8 percent of the housing stock. Lower limits would put 11 percent of owner-occupied homes out of conforming loan range in California.

There's no question, today's housing market doesn't need any more barriers to entry, but this is a tricky one. There's a very good reason to lower the loan limits, which is to get the government out of the housing business. Right now there is very little investor interest in mortgages, especially jumbo mortgages, with just a few jumbo securitizations this year at very low volumes.

The theory is that if you get the government out, even little by little, the investors will come back, but at what price? Comments at a recent conference of the American Securitization Forum, as reported by Inside Mortgage Finance, don't show a whole lot of excitement or confidence in the private market coming back to non-agency mortgages.

“It all has to do with liquidity. I would predict that many people are going to be even less willing to dip their toe into the non-agency market just based on what we’ve learned from the past. One of the key takeaways from the financial crisis and the liquidity crisis in 2008 was that, for all intents and purposes, we could not trade most of the non-agency products out there. It’s pretty evident that prime prices are now up 30 points higher,” said Nancy Mueller Handal, managing director of MetLife (from IMF).

“Where is the balance sheet that can hold and manage the size of the risk, the volume of the housing market that we’re talking about?” asked Sarah Wartell, executive vice president at the Center for American Progress (from IMF).

All this means that the higher end of the market will suffer, but that's a relatively small segment of the total market and the segment of the market in the least distress. So do we sacrifice some for the betterment(?)/overhaul of all? I'm sure we'll hear more this summer....Thoughts?

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