Raising Fannie Freddie Conforming Limits Would Provide Low-risk Stimulus for Housing Market

The housing market is currently stuck in a morass, and there are few signs that the situation will improve in the near term.  The chief problem is a self-reinforcing spiral of price declines, lost equity, foreclosures, and further price declines.  Credit is tight and underwriting conditions are even tighter.  Total Mortgage president and founder John Walsh has an idea that he believes will help stimulate the housing market at relatively little cost and risk to the taxpayer.  He would like to see the Fannie Mae and Freddie Mac conforming limits raised across the country.  Walsh would like to see conforming limits raised to $729,750 in all regions of the country in order to stimulate the jumbo market, which has struggled in recent years due to lack of investors.

Government sponsored entities (GSEs) Fannie Mae and Freddie Mac purchase the vast majority of residential mortgage loans that are originated in the United States.  These mortgages are then either securitized and sold to investors or are retained as part of Fannie or Freddie’s portfolios.  There is a statutorily imposed limit on the maximum size mortgage that Fannie or Freddie can buy.  This is referred to as the “conforming limit”.  Since 2006 the conforming limit has been set at $417,000.  However in some designated high cost areas, the conforming limit is much higher.

High cost areas are defined as ones where the median home price exceeds the conforming limit.  In these high cost areas the conforming limit may be raised to $729,750 (175% of the statutory limit).  Some of the high cost areas are: the greater New York City area, the Washington, D.C. area, Miami, and large swaths of California among other places.  In these areas, mortgages that fall between $417,000 and $729,750 are referred to as “high balance conforming” loans and are eligible for purchase by Fannie or Freddie.

Walsh believes that expanding the high balance conforming program to all areas of the country will help to stimulate jumbo home sales and pump money back into the economy.  Presently underwriting standards for jumbo mortgages are extremely stringent, stemming from the lack of private investment dollars in the sector (there has only been one jumbo securitization in the past year).  Many lenders require very high down-payments.  These conditions greatly reduce the pool of eligible buyers for jumbo properties.  Making GSE funding with sensible underwriting guidelines available up to $729,750 across the nation would cause more homes to be sold and would allow many borrowers to refinance their mortgages at lower rates.  For many people the savings would be considerable, and this money saved on mortgage payments would be pumped back into the economy.

In a normal economy, raising conforming limits would serve to crowd private investment dollars out of the jumbo market, which would be a bad thing.  In this economy, however, there are very few private investors in the jumbo market.  Temporarily raising the conforming limit would prop up the jumbo markets until private investors are ready to return.

This idea is starting to gain some momentum in the media.  Within the past week, it was mentioned in Housingwire as well as the Wall Street Journal.