Friday, January 25, 2008

Conforming Loan Limit Legislation

by Tanta on 1/25/2008 09:02:00 AM

The builders and Realtorz© are happy. The dollar amount is still apparently a matter of debate. The kabuki about the conventional conforming (Fannie and Freddie) limit being "temporary" is still in there, but it seems we've agreed to make the FHA change permanent. (Does this mean that the previously reported change to FHA making its maximum loan amount 100% of the conventional limit would be permanent, or that the FHA limit would be permanently set to whatever arbitrary dollar amount we eventually agree to? One assumes the former, as this one in particular has a hard time imagining a future in which FHA loan limits could be larger than Fannie and Freddie's. Then again, this one never thought she'd live to see $700,000 one-unit conforming loans in the contiguous 48, so whatever, dudes.) Paulson's leadership has been, er, flattened.

From the Wall Street Journal:

Democrats and Republicans provided conflicting versions of how much more leeway the companies will get. The package agreed upon by Congress would temporarily allow Fannie and Freddie to buy or guarantee mortgages as high as $729,750 in cities with high housing prices, according to House Speaker Nancy Pelosi. House Republican Leader John Boehner put the ceiling at $625,000, according to a news release.

The higher allowance would expire Dec. 31, though it would be permanent for loans guaranteed by the Federal Housing Administration, the New Deal-era agency that typically helps low- and middle-income home buyers qualify for low-interest mortgages. Currently, FHA can't guarantee mortgages higher than $367,000.

The plan, as outlined by Speaker Pelosi, also expands the role of FHA in assisting homeowners in trouble. In addition to raising the loan limits for FHA, Congress will permit more borrowers facing defaults to refinance through the FHA, and increase funding for housing counseling to $500 million to help home buyers who fall behind on their mortgage.

Raising the loan limits should allow a larger pool of borrowers to qualify for lower-cost mortgages or to refinance existing mortgages, something that has been difficult to do since mortgage lenders pulled back from nonconforming loans. "This, along with the fact that interest rates have dropped, will give a big kick to the demand side of the housing market," said Nariman Behravesh, chief economist at Global Insight, an economic consulting firm in Lexington, Mass.

Yesterday, Bankrate.com was quoting mortgage rates for 30-year fixed conforming mortgages of 5.25%, compared with 6.41% for some nonconforming mortgages.

But the plan means a major expansion of Fannie's and Freddie's already large role in providing funds and setting standards for American home loans. With the compromise, moreover, the administration is continuing a retreat from its efforts in the first half of this decade to scale down Fannie and Freddie and let free-market forces have more sway in the mortgage market.

Major accounting scandals severely tarnished both companies earlier this decade. But they continue to exert political power, largely because builders and Realtors see them as a vital prop for the housing market and fiercely resist efforts to constrain them.

Though the rise in the conforming-loan limit is supposed to be temporary, Congress may find it tough to reverse it in the face of warnings by builders and Realtors that such a move would cause another drop in home prices.

Yesterday, Treasury Secretary Henry Paulson said he had wanted to increase the conforming-loan limit only if Congress would pass long-stalled legislation designed to tighten regulation of Fannie and Freddie. But, he said, "I got run down by a bipartisan steamroller...Republicans and Democrats were united on this."
And who is in dire need of cheaper jumbo financing?