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Tuesday, January 22, 2008

$417K Conforming Loan Limit - How Important to Housing Market?

A conforming loan is a mortgage loan that conforms to GSE (Fannie Mae & Freddie Mac) guidelines. Fannie and Freddie have created a secondary market in these loans through securitization so that the primary market debt issues can be bought and — most importantly — traded by investors. The current conforming loan limit for a single family mortgage is $417,000.

This level is too low for financing many homes especially in high cost housing areas like: California, the Northeast, and Washington, D.C.

Presently, rates for conforming loan mortgages are below 6% and jumbo mortgage rates are above 7%. That is a very big difference in terms of affordability and what the monthly payments are.

The limit has become an important debating point regarding the economic stimulus package and putting the brakes on the credit crisis.

The real estate profession wants the loan limit raised.

REALTORS: Stimulus Package Must Include Loan Limit Increase to Help Homeowners, Economy --

The National Association of Realtors (NAR) has been calling on Congress and the administration to increase the loan limits for Fannie Mae and Freddie Mac from the current ceiling of $417,000 to $625,000. “This change will permit more families to enter the housing market by making more mortgages available with lower interest rates. Increased home sales will lower inventories and immediately start stabilizing the housing market and the economy,” Gaylord said.
Henry PaulsonThis morning Treasury Sec. Paulson said:
Congress needs to pass legislation to modernize the FHA, to increase availability of affordable FHA mortgages. It needs to strengthen regulatory oversight of Fannie Mae and Freddie Mac to ensure they will continue to fulfill their affordable mortgage financing mission. And as part of this reform, to temporarily raise the loan limit on conforming mortgages for securitization. Congress should also allow states to issue tax-exempt bonds to raise funds for innovative refinancing programs.

I am confident that Congress and the Administration share a sense of urgency and will work together to address the economy''s short-term needs. I look forward to engaging intensely with the Congress to get money into our economy quickly. [...]
Will Congress take action on the conforming loan limit in a timely manner? Raising the limit requires no spending, no tax increase, nothing more than written authorization. But, would you bet on Congress to take this simple, but important action soon?

US Senate leader Reid says Congress must get stimulus bill done by mid-February --
The Senate Majority Leader, Harry Reid, today said Congress and the Bush administration must pass an economic stimulus package by mid-February so as to ensure the economic pump is primed before President's Day recess next month.

'We have three more weeks until we have the President's Day weekend, and we need to have something on the president's desk by then,' Nevada Democrat Harry Reid in a meeting with congressional leaders and US Treasury Secretary Henry Paulson. [...]

Seeking Alpha:
Housing Market Tracker - Subprime Outlook --
Closing Costs "[The only mortgages] left for mortgage brokers largely are... [government-backed]“conforming loans,” of less than $417,000... Brokers say it’s not for lack of demand for subprime, jumbo and other loans. Mortgage Bankers Association: Earlier this month, mortgage applications surged to a four-year high on lowered interest rates. But lenders’ appetite for loans has dried up, brokers say, as banks and others see losses from risky mortgages made during the boom." (Orange County Business Journal, Jan. 21st)

Economic Stimulus Plans: The Good, the Hopeful and the Dubious "Fannie Mae (FNM) and Freddie Mac (FRE) are seen as unfairly competing with private enterprise... We believe that housing progress requires an increase in the conforming loan limit from the current $417,000. This would reflect actual pricing in much of the country. The House has passed such a bill. A temporary increase has been endorsed by both Bernanke and Treasury Secretary Paulson... [But] there is the possibility that election-year posturing could scuttle any plan. [...]
Realty Check blog:
Fed Cut: What It Means For Your Mortgage -- So does this cut stem the foreclosure crisis? Maybe a bit on the margins, but not really, and here’s why: the bulk of the folks facing foreclosure because they can't make their monthly payments have no equity in their homes and no money to put down on a refinance.

While rates might be lower, this is a market where lenders and investors are much more aware of risk and will gravitate toward borrowers that represent less risk. So many folks will still find themselves in trouble. For people who are having trouble paying the initial rate on the loan, forget it. No help there. [...]
But what good is a increase in the conforming loan limit if Fannie and Freddie go bust?

Credit Suisse estimates that both Fannie Mae and Freddie Mac face $16 billion in losses for the fourth quarter --
The government-chartered companies’ earnings and capital haven’t yet been hurt by declines in the $230 billion of AAA rated “non-agency” mortgage-backed bonds they hold, according to New York-based analysts Moshe Orenbuch and Kerry Hueston …

With other financial companies this quarter already reporting “other than temporary impairments” of mortgage-related holdings that they wouldn’t normally need to report under accounting rules, Fannie Mae and Freddie Mac may need to follow suit, the analysts wrote in a report today.

“We believe that this will likely spur the GSEs’ regulator to compel similar actions,” they wrote, referring to the Office of Federal Housing Enterprise Oversight, regulator to the so-called government-sponsored enterprises.

McLean, Virginia-based Freddie Mac’s subprime securities may be worth $8 billion to $11 billion less than the prices at which the company is carrying them on its books, while Washington-based Fannie Mae’s bonds may be worth $2.25 billion to $5 billion less, according to Credit Suisse.

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