The conforming mortgage loan limit should NOT be raised
Raising the conforming loan limit encourages affluent borrowers to buy expensive homes, the opposite of what lawmakers intended when the subsidies began.
In order to spur lending to lower and middle income Americans, the GSEs and FHA provide loan guarantees to mortgage loans under the conforming limit. The money for mortgage loans is all private money, but with the government guarantee on smaller loans to less affluent Americans, the cost of these loans is lower, and lenders will underwrite more of them, which is what the policymakers intended to accomplish.
During the housing bubble, the conforming limit rose as high as $417,000, but when the housing bubble burst, this limit was raised to $729,750 in markets like Coastal California that needed the most government support to maintain peak prices. In 2011, the conforming limit was lowered from $729,750 to $625,000 ($546,250 in San Diego). Now, rather than subsidizing a small percentage of loans to lower and middle income Americans, The the GSEs and FHA insure over 80% of the loans in the residential housing market.
The conforming loan limit demonstrates the tug-of-war between two conflicting desires of policymakers.
On one side, they want to lower the limit to restore the prior mandate of insuring loans only for lower and middle income Americans and reduce the potential liability for the US taxpayer, who would currently cover all the losses if the market crashes again. If the conforming loan limit were reduced, it would reduce the size of the GSE operations and make it easier to someday dismantle them; however, the last time the conforming limit was dropped, Irvine, CA witnessed an 84% decline in sales volume in the price range no longer financeable with GSE loans. But this must be done because as long as the GSEs are insuring more than half the housing market, there is no way we can reform or eliminate them.
On the other side, lenders want to expand the current loan guarantees to continue to originate riskless loans, generate fees, and inflate house prices in order to purge the bad bubble-era loans off their balance sheets. Lawmakers also want to restore home values as this is the only store of retirement wealth many Baby Boomers possess.
With home prices still climbing, baseline jumbo-mortgage thresholds may be raised for the first time in a decade
Jumbo mortgages for single-family residences exceed $417,000 in most parts of the country and $625,500 in high-price markets. But with home prices climbing back to prerecession peaks in some markets, baseline jumbo thresholds may be raised for the first time in a decade.
The agency that sets these limits, the Federal Housing Finance Agency (FHFA), in May requested public input on its house price index. This index includes sale-price information on government-backed mortgages as well as real-estate sales compiled by research firm CoreLogic from hundreds of U.S. counties. Distressed sales are included but not appraisal values from refinances.
The deadline for input is July 27, and the FHFA will decide this fall whether to change the baseline limit starting Jan. 1.
When policymakers are considering a change, they like to float trial balloons in the mainstream media to gauge the reaction. Here is mine: Don’t do it!
This is policymaker’s moment of opportunity for reducing the footprint of the GSEs and the FHA on the mortgage market. Raising the limit is exactly the opposite of what they need to do. Increasing the conforming limit will merely perpetuate the problem of the government supporting the housing market.
The meme in housing is all about healing and strength. If policymakers really believe this spin, then they should be looking to lower the limit and reduce the percentage of the mortgage market insured to its historic norms of about 25%. Any increase in the conforming limit while the government is already insuring 80% or more of the mortgage market is a tacit admission of the market’s weakness, not an affirmation of its strength.
In the early 1970s, the baseline limit for conventional loans was just $33,000. That was the maximum amount a homeowner could borrow to qualify for a “conforming” mortgage—one financed by Fannie Mae or Freddie Mac. The $33,000 limit rose steadily over the years to keep up with home prices. Hawaii, Alaska, Guam and the Virgin Islands got higher loan limits because of the high cost of living.
The Housing and Economic Recovery Act of 2008 established the current formula, which is based on median home-sale prices reported in a monthly FHFA survey. However, there is some wiggle room in high-cost areas, where conforming loans can exceed the baseline by up to 150%.
To keep up with rapidly rising home prices, FHFA in January raised its conforming-loan cap in 46 counties nationwide—the largest number since 2012. Areas affected include metro Baltimore, Boston, Denver, Nashville and Seattle.
Loan-limit increases encourage more high-end home sales because many people, especially those upgrading for the first time to a pricier home, are more comfortable with a conforming loan, says Allen Decuyper, an agent with Nashville-based Neal Clayton Realtors. “For some it’s a psychological hurdle to get over—just the word ‘jumbo’—so [raising the limit] helps,” he adds.
Encouraging high-end home sales in the move-up market is the directly opposed to the purpose of the GSEs or FHA financing.
So is this a good idea? Perhaps one of the commenters on the Wall Street Journal article said it best:
Carl Martin —
Give stupid white middle & upper middle class borrowers more rope to hang us all…again?
Sounds like a plan.