Researchers foresee soft landing from jumbo loan limit drop
Lowering the conforming loan limits in October will still leave room for the government-sponsored enterprises and the Federal Housing Administration to fulfill their housing finance missions, according to separate research notes from Capital Economics and George Washington University.
Their findings counter a recent report from the National Association of Home Builders, which forecasts more than 17.2 million homes would be left above the limit.
Congress raised the conforming loans limits in 2008 to allow Fannie Mae, Freddie Mac and the FHA to insure, guarantee and buy more loans at a time when private funding froze during the financial crisis. Without an extension, the maximum mortgage amount will drop to $625,500 from $729,750 in high-cost areas.
"The fear is that house prices would then take another large leg down as it will be impossible for buyers to secure finance in some cities such as Washington D.C., San Francisco and New York," said Paul Dales, senior U.S. economist at Capital Economics. "There are two reasons, however, why these fears are unlikely to materialize."
Dales cited the Federal Housing Finance Agency statement that only 250 counties nationwide would be affected if the limit is lowered, and more than 50 of those counties would see a limit drop of less than $25,000. The GSEs funded 50,000 mortgages in 2010 that were above where the new limits would drop to in October. These loans are worth roughly $30 billion and account for just 5% of all new mortgages financed by the GSEs that year.
Dales said most of those affected, particularly in California, would still be able to take out a jumbo loan from another lender. In fact, those pushing for the loan-limit drop trumpet this assumption that the private market can first return at this higher-valued section of the market. The only private-label residential mortgage-backed securities issued since the crisis included jumbo loans.
Researchers at George Washington University said lowering the current loan limits would have a small impact on FHA operations. The agency could still serve 95% of the market it has historically targeted even if the FHA loan limits were cut in half.
Studying past loan data, GWU economy researchers said a maximum mortgage amount for the FHA only needed to be as high as $200,000 in the low-cost cities and $350,000 in more expensive neighborhoods.
The FHA market share grew to more than 56% in 2009 from 6% in 2007. GWU researchers said the FHA needs only between a 9% to 15% market share to reach the amount of low-income first-time homebuyers with high loan-to-value mortgages.
"FHA’s expansion played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009," said Robert Van Order, co-author of the report along with Anthony Yezer. "However, we now are left with large loan limits that were set when home prices at the top of the bubble. They don’t reflect current market conditions and are unlikely to assist the FHA in reaching its historical constituencies – first time, minority and low income homebuyers."
Write to Jon Prior.
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