Let’s get beyond the slippery accounting practices of Fannie Mae in 2004 – or that matter of Freddie Mac in 2003. Both mortgage giants are shareholder-owned yet chartered by the U.S. Congress to maintain a constant flow of loan funds for the nation’s housing market. You would expect a higher standard of performance.

Instead, let’s dwell on the amazing impact of the family home on the general economy. Single-family homes, while viewed as a solid investment for years by financial advisors, has begun to shed its dropping its “ill-liquid” moniker and become a flexible, versatile asset that has evolved into an enormous instrument of wealth in this country.

In fact, a new study produced by the Joint Center for Housing Studies of Harvard University and Macroeconomic Advisers showed housing wealth has a more immediate impact on consumer spending than stock wealth. Low interest rates the past five years, coupled with steady home appreciation, have provided a more reliable pot of funds than the staccato financial markets.

“Aggressive cuts in short-term interest rates at the beginning of the decade forestalled economic problems and led to record home sales and home equity borrowing,” said David Lereah, chief economist for the National Association of Realtors. “Without the stimulus, housing’s contribution to consumer spending would have been about half as great, the recession much worse and the recovery less robust.”

Despite what you might have heard, those aggressive cuts in interest rates still have not returned to normal levels. Home-loan rates, expected to rise considerably by the fourth quarter of 2004, were bouncing lower at the end of November than they were at the end of April. And, what we have finally learned is that consumers are using those low mortgage rates to buy furniture, automobiles, tuitions and boats via home equity loans.

According to the Harvard study, housing contributed more than one-quarter to consumer spending during 2001-2003. About half of that boost was attributable to gains in housing wealth through equity withdrawals and realized capital gains. In the fourth quarter of 2003, home equity accounted for 19 percent of household wealth, slightly higher than the combination of stocks and mutual funds, according to the study. Home equity exceeded the value of stock owned directly by households by $2.6 trillion.

Home appreciation and low interest rates also provided a cushion to help a record number of seniors to age in place via a reverse mortgage. Reverse mortgages allow senior citizens to draw cash out of the equity built up in their homes without risking the loss of those homes.

HUD, through FHA, insured more than 36,000 Home Equity Conversion Mortgage in fiscal 2004. This type of loan accounts for approximately 90 percent of all reverse loans nationally. The agency, which anticipates huge reverse mortgage numbers in 2005, had insured a previous record 18,097 HECMs during fiscal 2003.

“When you close more than 36,000 of these loans in one year in excess of $6 billion, you stop considering it a little something on the side,” said John Weicher, the assistant secretary of housing who oversees Federal Housing Administration programs.

The loan limit for FHA Home Equity Conversion Mortgages is pegged to the Fannie Mae limit. The highest of the loan limits – applicable generally to major metropolitan areas – will increase to $312,896 (equal to 87 percent of the Fannie Mae limit) in 2005, up from $290,319. The lowest loan limit, which generally applies to rural and non-metropolitan areas, will rise to $172,632 (equal to 48 percent of the Fannie Mae limit), up from $160,176.

Freddie Mac and Fannie Mae may purchase single-family mortgage loans up to $359,650 effective Jan. 1, 2005, the Office of Federal Housing Enterprise Oversight announced recently.

The previous limit on single-family mortgage loans was $333,700. The increase in conforming loan limits is based on the October-to-October changes in the average house prices, as published by the Federal Housing Finance Board, and on supervisory guidance issued by OFHEO, the federal regulator of Fannie and Freddie.

The charters of Fannie and Freddie permit an annual adjustment to the maximum size of mortgage loans the two companies may purchase.

Also effective Jan. 1, 2005, other loan limits will be:

  • $460,400 for mortgages on two-family properties (up from $427,150);

  • $556,500 for mortgages on three-family properties (up from $516,300), and

  • $691,600 for mortgages on four-family properties (up from $641,650).

The limit in designated high-cost areas – Alaska, Guam, Hawaii and the U.S. Virgin Islands – will be 50 percent higher for first mortgages.

Tom Kelly’s new book “How a Second Home Can Be Your Best Investment” (McGraw-Hill) was written with John Tuccillo, former chief economist for the National Association of Realtors. Tom can be reached at news@tomkelly.com.

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