The Obama Administration is currently working on a plan for the future of housing finance in the United States. The report was supposed to be delivered last week, but the deadline was missed. A rumored part of the plan would be to allow the high balance conforming loan limit to fall to $625,000 in September. This could cause mortgage rates to rise for prospective homeowners in high cost areas such as California and New York.
There is a legal limit on the maximum size mortgage loan that government sponsored entities (GSEs) Fannie Mae and Freddie Mac can purchase. This is known as the conforming limit, and is presently set at $417,000 in much of the country. In some areas where the median home price exceeds the conforming limit, the conforming limit is higher, up to $729,750 (175% of the conforming limit). Loans that fall in between $417,000 and $729,750 are referred to as high balance conforming loans. High balance conforming loan limits were temporarily raised in 2008 in order to stimulate jumbo home sales and to more equitably spread access to cheaper GSE funding.
The presence of the GSEs in jumbo markets crowds private investors from the market because few are willing or able to match Fannie and Freddie’s comparatively low rates. If the GSEs are unable to purchase loans above $625,000, the slack will need to be picked up by private investors. These investors will demand a higher return than the GSEs, and mortgage rates will rise on jumbo mortgages. Additionally, private investors often have higher down payment requirements than Fannie and Freddie. Those purchasing homes valued between $625,000 and $729,750 will not only see rates rise, but will likely have to put down more money up front.
This will mostly impact those who live in places such as Boston, Miami, New York City, Denver, and many California cities where the cost of housing is much higher than in other parts of the country. The increase in mortgage rates and required down payments will make it more difficult to buy and sell a house, and we could see additional downward pressure on houses in this price bracket.
The withdrawal of government support would be a reaction to the housing crisis, which was caused at least in part by the policies of Fannie Mae and Freddie Mac (although how much blame they bear is a subject of much debate). Fannie and Freddie were seized by the federal government and put into conservatorship in 2008 in order to prevent their collapse. Since that time, they have drawn more than $150 billion from the Treasury in order to remain solvent. The federal government backs or insures about 95% of new loan originations at this time, a number which many people feel is too high. Do you think the high balance loan limit should be allowed to revert to $625,000 in September? Let me know in the comments section below.