Commentary: On Economic Stimuli and Raising the Conforming Loan Limit
In the wake of a still-blurry announcement that Congressional leaders have agreed in principle to raise the conforming loan limit to at least $625,000 in defined high-cost areas -- blurry because it still isn't exactly clear what that limit would be or how it would be applied -- broader industry reaction to the move is decidedly mixed. If you're a realtor, of course, you're pumped. It didn't take long for the NAR to issue a press release exhorting the Senate to "achieve quick enactment" of the plan. More central to the mortgage banking industry, the Office of Federal Housing Enterprise Oversight said Thursday that it was "very disappointed" in the proposal, believing that priority needs to be given to comprehensive GSE reform before any discussion of lending limits can reasonably be had. Just before all of this took place, HW published a story looking at the debate over raising conforming limits. First and foremost here is risk, and the Wall Street Journal caught up with HW's earlier coverage on this issue today:
... 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.We may as well get used to saying "we're all conforming now" if this sort of legislation passes, as a result. And that could have all sorts of interesting outcomes for the industry. For one, it should bring up the question of whether or not mortgage rates for GSE-eligible loans will actually stay comparatively low. "Fair access to housing capital," after all, isn't likely to be a costless thing. It also should bring up the question of regulation; regulating the beasts that Fannie and Freddie already are is a daunting task, one that OFHEO director James Lockhart has repeatedly said the agency is ill-equipped to do. What would that end up looking like when conforming mortgage market share begins to approach everything but hard money? Beyond that, there are longer-term implications for our economy as well. If this ends up being a move to prop up home prices in "high-cost" areas, where housing prices are fundamentally at levels well beyond what income would otherwise support, what then? Home prices must still eventually come back down; and instead of getting their drugs from a private dealer on Wall Street, borrowers would be working with a dealer on Capitol Hill that wouldn't ever really be able to pull that needle out of the nation's collective housing vein. That may be fine for some borrowers in California, but it means the rest of the nation -- and, in particular, the majority of us in areas that aren't high-cost -- will be subsidizing that sort of habit. Is that really where tax dollars that ostensibly need to stimulate a sagging economy should be going? Lastly, there is this: while it will may end up causing a number of short- and long-term problems, raising the conforming limit won't actually help at all with borrower defaults. While the move may or may not provide unencumbered jumbo borrowers with access to cheaper credit, it most certainly won't magically provide existing homeowners with the additional equity that they'd need to refinance their way out of a mortgage that they're currently underwater on. Even if these borrowers were otherwise eligible for a conforming loan, nobody will lend $610,000 on an asset that's currently worth $540,000 -- or less. I've said this before, and I'm going to say it again: defaults need to happen. Prices need to come down. But the sun will shine again -- eventually -- and when it does, I'd much rather see a mortgage industry with a healthy and competitive private-party market. In the long run, consumers will be much better off for it.