Loan Limit: Will It or Won't It Hurt Housing?

A few weeks ago the National Association of Home Builders put out a report asserting that new lower loan limits going into effect in October 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."

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On the blog that day, I wrote that the games were only beginning.

Now another report, this time from researchers at George Washington University, is suggesting just the opposite, that lower loan limits may raise cost for a very few borrowers, but overall will not affect most mortgage shoppers.

The report focuses on the FHA, claiming, "The FHA still could serve 95 percent of its historic targeted market even if the maximum FHA loan limit were reduced by nearly 50 percent." Its market share right now (30 percent) far exceeds its target population.

“FHA’s expansion played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009,” said Robert Van Order, co-author of the report. “However, we now are left with large loan limits that were set when home prices at the top of the bubble. They don’t reflect current market conditions and are unlikely to assist the FHA in reaching its historical constituencies – first time, minority and low income homebuyers."

After analysis, researchers concluded that a loan limit of $350,000 in high cost markets at $200,000 in the lowest cost markets would, "satisfy more than 95 percent of FHA's target constituency."

Economist Paul Dales at Capital Economics extrapolates to Fannie and Freddie, and agrees, albeit with concerns: "The scheduled reduction in conforming mortgage loan limits at the start of October is unlikely to trigger a further precipitous fall in house prices as some have suggested. Nevertheless, it certainly won't help the market at a time when millions of households already can't obtain a mortgage."

Dales cites FHFA (the overseer of Fannie and Freddie) studies which find that the lower loan limits, "will only affect 250 counties, or just 8 percent of the 3,000 counties in the U.S.…in 2010 the GSE's provided just 50,000 mortgages ($3b) where the loan amount was above the new limits. That's just 5 percent of all new mortgages provided by the GSE's last year and 3-4 percent of new loans issued by all lenders."

He then adds that those left on the outside of the loan limits will just go get jumbo loans, even though they come at a higher price. I would add that they also come with even tougher credit standards, not that conforming loans these days aren't tough enough to obtain.

A big issue, though, is who will fund this jumbo loan market that is about to get many more customers. Also, the bulk of the sales action right now is on the lower end of the market.

If we're going to return to a "normal" housing market, we need those move-up buyers. Yes, the distress is on the low end, but the mid range is stalled, and that's not healthy. I'm sure we'll be hearing more as we near the fall.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick