Conforming loan limit: your thoughts?

Without claiming to have laid the issue to rest, maybe it's time to turn our attention from what, if anything, House leaders have agreed to in regards to an increase in the conforming loan limit, and consider what the impact of any increase might be on housing markets and the economy. This would be a great topic for a discussion. Click "continue reading" to join in.

First, to recap, there is still some confusion over how much the conforming loan limit would be raised under an agreement House Democrats and Republicans announced Thursday.

According to House Republican Leader Rep. John Boehner, a side agreement to the proposed $150 billion economic stimulus package would raise the conforming loan limit from $417,000 to $625,000, allowing Fannie Mae and Freddie Mac ("the GSEs") to buy up and guarantee loans now considered "jumbo." The upper limit for FHA loan guarantee programs would be jacked up even more, from $362,000 to $725,000, Boehner's office has said.

But Democrats, including Speaker of the House Nancy Pelosi, say the conforming loan limit AND the upper limit for FHA loan guarantees would both be increased to $729,750. The increase in the conforming loan limit would be a temporary one, expiring after one year, while the new limit for FHA loan guarantees would be permanent, Pelosi's office says.

Treasury Secretary Henry Paulson said Thursday he's ready to go along with an increase in the conforming loan limit -- even though the Bush administration had been insisting that Congress pass legislation strengthening oversight of Fannie and Freddie first.

Since Paulson is on board, I thought I'd ask the Treasury Department if they knew exactly what it is he's on board with. Is it $625,000 or $729,750? A Treasury Department official e-mailed me that the deal is between House leaders, and that the question should go to them. "We don't like this provision," the official said. "While we're on board with the package, there are parts of it we don't like."

OK. So what is the package?

"I think we're still trying to work that out," a Boehner staffer e-mailed me today about the discrepancy between his boss's version of the agreement and Pelosi's. Pelosi's office had no comment.

The best bet might be that the White House (through the Treasury Department ) has reached an agreement with House Democrats in the hopes of getting GSE reform legislation back on track, and that if the feelings of House Republicans have been hurt, too bad.

Sen. Chris Dodd, D-Conn. -- who as chairman of the Senate Banking Committee has the power to block GSE reform legislation -- met with Paulson this morning and pledged action on that front.

What would whatever the agreement is do?

So, let's assume that House Democrats and the White House have agreed the conforming loan limit AND the upper limit for FHA loan guarantee programs is going to $729,750. What does that mean for you? First of all, according to yet more details from Rep. Barney Frank's office, there's would be a caveat to the increase in the conforming loan limit: a cap equal to 125 percent of the median home price in a given market.

In other words, if the median home price in your metropolitan statistical area (MSA) is $333,600 or less, the conforming loan limit would not go up at all -- it would be "intercepted" by the 125 percent lid.

Mortgage broker and syndicated columnist today writes that of the 156 metropolitan statistical areas (MSAs) in the National Association of Realtor's database, only 20 will benefit.

"In my home MSA, Boulder, Colo., the city has a home-price median near $550,000," Barnes writes. "But the whole MSA is $367,000, hence a new Fannie/FHA limit ... of $460,000 is an undetectably minor help."

Barnes, who is concerned that the Fed's drastic cuts in short-term interest rates could send some mortgage rates in the other direction, thinks the economic stimulus package will be harmless at best.

NAR, on the other hand, has great expectations for an increase in the conforming loan limit. Just kicking it up to $625,000, the group says, could prevent 210,000 foreclosures and create $42 billion in economic activity.

Because secondary mortgage market investors have lost their appetite for loans that don't have the backing of Fannie and Freddie, interest rates on jumbo loans above the $417,000 conforming loan limit can be a full percentage or more than those eligible for purchase by the GSEs.

In a statement Thursday, NAR President Richard Gaylord said home buyers with good credit could save $3,000 to $5,000 per year "by not being forced into the current jumbo mortgage market."

That could translate into more sales and prop up sagging prices, which not everybody wants to see -- especially those who view an increase in the conforming loan limit, or higher limits for FHA-backed mortgages -- as a sort of indirect government bailout.

"The more loans FHA takes on from the private sector and backs with government money, the more risk there is to taxpayers of having to make good on those debts," said Pete Sepp, of the National Taxpayers Union in a press release today. 

Although FHA loan guarantee programs are administered by the government, they are self-sustaining through insurance premiums paid by borrowers (they've even run a surplus that some Democrats want to tap for affordable housing programs).

The House and Senate have both passed FHA modernization bills that would allow the government to adopt "risk based pricing" to further expand the pool of borrowers served, by charging those with marginal credit higher premiums (differences in the House and Senate versions of the bills are still being ironed out). Of course, if FHA administrators miscalculate and end up in the red -- as several private mortgage insurers have -- taxpayers would end up footing the bill.

And while Fannie Mae and Freddie Mac are private, publicly-traded companies, the assumption is that the government will come to their rescue if they get into financial trouble, too. Fannie and Freddie, the thinking goes, play too important a role in providing liquidity to mortgage markets to let them go under. Despite protests by the Treasury Department that the GSEs' debt is not backed by the federal government, the belief that the government will in fact come to the rescue if the s___ hits the fan helps Fannie and Freddie borrow money at better rates than "private label" mortgage financiers.

A GSE reform bill passed by the House in May would address this issue by creating a new regulator, the Federal Housing Finance Agency, which would have the power to place Fannie and Freddie in receivership. With powers like a bank regulator's, FHFA could not only take over Fannie and Freddie's day-to-day operations as a conservator, but close the GSEs down and liquidate their assets, leaving shareholders and creditors, rather than taxpayers, on the hook for losses.

Hence the Treasury Department's desire to get GSE reform signed into law before Fannie and Freddie venture into what is now jumbo loan territory.

Another aspect of GSE reform is the 3 percent growth limit on Fannie and Freddie's loan portfolios, which now total about $1.5 trillion. Fannie and Freddie might have to cut back on the number of smaller loans they back if they start buying or guaranteeing bigger mortgages, especially if some Democrats who want to lift the limit don't get their wish.

Since the GSEs were created to help low- and moderate-income families get financing, some question if raising the conforming loan limit would detract from that mission. For more on that issue, see the recent report by Fannie and Freddie's existing regulator, the Office of Federal Housing Enterprise Oversight.

Your thoughts?

So, people: do you see the need for a greater role for Fannie, Freddie and FHA in your market? What else should Congress be looking at doing (or not doing) to revive mortgage and housing markets?

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