Decreasing Loan Limits Creating Unsettled Feelings in an Unsettled Market

June 28, 2019 | By admin | Filed in: Blog.

In a planned effort to lessen the federal government’s role in the mortgage market, maximum loan limits are scheduled to decrease as of October 1, 2011.  Currently, the maximum loan amount that will carry federal backing (Fannie Mae, Freddie Mac and FHA) is $729,750.  If the October 1 plan moves forward as scheduled, the new, lower amount will be $625,500.  This proposal is supported by the Obama Administration and Congress is expected to observe the upcoming deadline.

 

However, not everyone is backing the plan.  Industry groups are warning about possible adverse effects of lowering the loan limit.  Many argue that the maximum amount of $625,500, a $104,250 drop, would drag housing prices down even further-especially in upper-income neighborhoods.  “”If the loan limit is lowered, buyers trying to get into the pricy neighborhoods may be forced to stay put or scale back their aspirations.  Owners of more expensive homes would have a harder time selling.  And refinancing may no longer make sense for some homeowners, analysts said.””[1] Because buyers would have a more difficult time buying, the potential sellers would have the same problems selling.  The fear is that to unload the properties, sellers would have to make sales concessions, which could further drive down prices in the upper echelon of the market-something for which no one in this recovery is rooting.

Even in areas that have remained only modestly hurt by the housing collapse, such as Washington, D.C. and its immediate suburbs, there is a real fear that without the backing of the federal government, loans in amounts higher than the $625,500 limit will be too expensive, and therefore unattractive, to the majority of borrowers.  If the costs of larger loans become too expensive, the market might stagnate and further delay a recovery.  This, of course, is yet to be seen, but as existing home sales unexpectedly fell in the month of May, along with other blows to the housing market, many are calling on the government to reconsider its position to avoid any further weakening of market recovery.

The current loan limits were instituted in 2008 as a temporary solution to investors’ reluctance to purchase jumbo mortgages.  Government-backed loans carry less risk to the lender and the investor because the amount is guaranteed.  At that time, the loan limit was $417,000 (FHA loans were capped at $362,790).  As a result of these low limits, rates on “jumbo” loans climbed.[2]

This would not be the first time for loan limits to be set at the $625,500 mark.  Limits briefly dipped to this low in 2009 when the temporary limit expired.  This only lasted a few months before the higher amount again became the conforming limit.  These limits refer to single-family homes in what are known as “high-cost” areas.

The idea behind lowering the loan limit is to attract more private investors and private lenders to the “jumbo” market and lessen the government’s involvement.  This, says David Stevens, former FHA Commissioner, “was responsible at the time [of the White House’s position paper].”  He adds though, “I don’t think anyone anticipated some of the numbers that are softening the housing market and with no signs of improvement for the foreseeable future, this is, unfortunately, an awkward time to be scaling back.”[3]  Mr. Sterns is now president of the Mortgage Bankers Association.

There has been no official comment from the White House, but Rep. Brad Sherman (D-CA) and Rep. Gary Miller (R-CA) have co-written and introduced a bill to the House of Representatives that would permanently keep the maximum limit at the current figure.  H.R. 1754 – Preserving Equal Access to Mortgage Finance Programs Act was introduced on May 4, 2011 and is waiting to pass the House of Representatives.  If the resolution does pass the House, it is unclear as to how the Senate will vote.


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