The maximum conforming mortgage limit has been stuck at $417,000 for 10 long years.
There is an upward exception for “high cost” counties — all 234 of them. The other 2,910 counties are on their own, especially high-cost “islands” within them.
In the great spasm of sometimes beneficial and sometimes punishing legislation following the credit bubble, the Housing and Economic Recovery Act (2008) forbade any increase in the conforming loan amount — until U.S. home prices had recovered to pre-crisis levels.
Now they have. Will the conforming limit rise now?
The arguments for — and against — raising the limit
Remember that Fannie Mae and Freddie Mac — the “GSEs,” government-sponsored enterprises — are still in conservatorship by the Treasury.
The political right hates them both, and the left generally would limit the GSEs to helping lower wage-earners.
There is no alternative to the GSEs because they work so well, yet politics is in denial.
Why should the limit be raised? Because the market for larger loans — jumbos — is still badly broken, looking a lot the way the U.S. would without the GSEs.
Specifically, it’s tough to get a fixed-rate jumbo done with less than 20 percent down (truly mean spirits think that’s a good idea).
We can get to 95 percent with adjustable-rate jumbos, but that just magnifies risk. As does tacking a piggyback second loan to a conforming loan — all data says that practice elevates the default risk of the first mortgage.
Jumbo underwriting is far too tight — just cherry-picking — and highly unreliable and unpredictable from one wholesaler to another, and even file-to-file at the same outfit.
Why not just expand the “high cost” county list? Because of those costly islands within odd-demographic counties. U.S. counties come in all shapes and sizes, few with uniform housing.
Why do anything at all — and why now?
Where’s the fire? What real stress is the housing market under? Black Knight’s September Mortgage Monitor to the rescue.
Of all GSE loans closed last year at exactly $417,000, 25 percent of the borrowers were forced to take a piggyback second loan.
That’s bad business for everyone, including the nation.
Compare total GSE loans in the last year at $417,000 exactly to all of the loans closed between $405,000 and $416,000…seventeen times as many at $417,000. That’s gaming and crowding.
Compare loans at exactly $417,000 to those between $418,000 and $432,000…the drop-off is 70 percent.
Rates on jumbos are often significantly higher than on GSE ones, but not since the bubble. There is no rate incentive to stick with conforming size. Jumbo terms and underwriting are the causes of mortgage starvation north of conforming amounts.
Casting the conforming limit in concrete is an exclusionary practice, harmful to borrowers and the housing market itself.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
