Pending conforming loan limit decrease puts California on edge
With the conforming loan limits expected to drop in October, the California Association of Realtors warned of the impending harm to homeowners, while the only private-label securitizer left notified investors of more opportunities.
The conforming loan limit determines the maximum mortgage amount the Federal Housing Administration, Fannie Mae and Freddie Mac can buy or guarantee. Without congressional action, the limit will drop to $625,500 from $729,950 for the majority of counties nationwide on Oct. 1.
These three agencies currently fund 95% of the mortgage market, and housing finance reformers point to lowering this limit as a first step to usher in private capital.
However, according to CAR, more than 30,000 Californian homeowners will face higher down payments, higher mortgage rates and stricter loan qualification requirements when the limits drop.
The $104,450 decrease in most counties will not be felt in some California counties. In fact, it will be steeper.
CAR analyzed the effect of dropping the limit across several specific counties in California. In Monterey County, for instance, the government-sponsored enterprise limit will drop a total of $246,750, followed by a $151,250 drop in San Diego, and $141,550 in Sonoma County.
The FHA conforming loan limit will fall $201,450 in Merced County and $164,650 in Riverside.
"By reducing the conforming loan limit, thousands of California homebuyers will be shut out of homeownership," CAR President Beth Peerce said. "The higher mortgage loan limits are critical to providing liquidity in today’s housing market and are essential to our housing recovery. We urge Congress to maintain the current limits and make them permanent to provide homeowners and homebuyers with affordable financing and help stabilize local housing markets."
Redwood Trust ($20.33 0%), a real estate investment trust based in California and the only firm to issue a residential mortgage-backed security since the financial collapse in 2008, said the conforming loan limit decrease could drop more loans into its grasp. Redwood already plans to issue two more RMBS by the end of the year.
If annual residential mortgage originations return to $1.5 trillion and jumbo loans — which served as the collateral in its RMBS deals — account for 20% of that, originations of jumbo loans could reach $300 billion, Redwood said in its first quarter report to investors.
"With GSE reform, the portion of the mortgage market that could potentially be available to Redwood could be substantially larger if the conforming loan limits are reduced (as the Obama administration has indicated it intended to do) during the reform transition period, and perhaps still larger if, as part of GSE reform, the concept of conforming limits is eliminated," Redwood said.
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