Why is Conforming Loan Limits a concern?

What is a Conforming Loan Limit, and what's so important about it.  As far as what is a Conforming loan amount.  I live in California, it is considered a high cost area, and  the average median price home is approx. $588,000 as of August 2007. 

That can change somewhat, as prices go up or down.  Having said that,  the Federal Government mandates Conforming Loan Limits that Fannie Mae and Freddie Mac are allowed to purchase on the secondary market. 

Currently the maximum Conforming Loan Limit is set at $417,000 for 2006 for California, anything over the $417,000 Fannie & Freddie will not purchase, that's considered a Jumbo Loan.  If the Loan can not be purchased by Fannie & Freddie, the bank or financial institution is stuck with the loan, and can not make any more loans, as they may soon run out of financial resources to lend out any money. 

It's like a checking account, if you don't have enough in your account, and you lend or write checks for more than what's in your account, you start bouncing checks.  Then some banks may end up closing their doors. 

The Federal Government also mandates that they have Loan Loss Reserves, much like overdraft, but that can land you back in deeper do-do.  (Countrywide is an example that they are having to dip into their reserves. 

That's part of the problem, in simple terms, credit crunch.  That's why sometimes lending institutions sell to Fannie & Freddie on the secondary market.  This keeps money flowing in the country.  The feds control two key interest rates in their fight in monetary policy, the discount and the federal Funds rates. 

The Fed Funds rate controls short term interest rates, like Adjustable, HeLoc's (Home Equity Lines of Credit) hybrids loans, fixed 2,3,5,7,10 years, 100% financing and so forth, as well as Consumer Loans, that affects cars financing, construction loans, credit cards,  etc.

That's how it's all tied together.  The Feds make adjustments according to risk of inflation, deflation and recession. In good times, bad times, the Federal Reserve Systems is the best misunderstood governmental agency, and that's why education is so important, because we depend on so many factors just to co exist with each other.  Good Luck, God Bless, and Make it a Productive week.

Carlos R. Arvizu Sr.

562-755-3856.