The New Conforming Loan Limits Are Limiting

Roger Schlesinger
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Posted: Nov 11, 2008 11:30 AM
The New Conforming Loan Limits Are Limiting

Friday the government released the new Fannie Mae and Freddie Mac maximum loan limits and it simply makes no sense to me. One of the biggest problems facing this economy is the real estate market. The losses, both actual and unrealized, are in the billions. Five to ten percent of the houses in America are facing foreclousre because most of these houses have higher loans than the properties are worth. Then why not make it easier to get a loan by raising every state in the union to the new maxim loan limit for single family residences, $625,500? This does not mean everyone gets a loan for $625,500. It means everyone who has the proper loan to value, earnings, credit and reserves can get a loan up to $625,500. Instead, the powers that be allowed a section in each of the following 17 states to be able to fund loans up to $625,500. I don't even think that was a good idea, and that will be discussed in detail later.

Hawaii, Alaska, (Guam and the Virgin Islands?) have already been given the $625,500 years ago and will be left out of this discussion. It is interesting to note that Honolulu and Kauai have been raised into the $700,000 range although I cannot see any benefit to the nation for this increase.

The following states have had counties raised to $625,500 because their home prices have reached 115% of the median home prices in their respective county. We start with California which had 10 counties qualify including Los Angeles, Orange and San Francisco but not Santa Barbara or San Diego. Next was Colorado with 6 counties, Washington D.C. and Idaho with its Teton county. Maryland had 5 counties, and Massachusetes had Dukes and Nantucket. New York had 10 including New York, Bronx and Queens while New Jersey had 11including my wife's birthplace, Bergen county. North Carolina had 3 counties, Pennsylvania had one, Pikes County, Virginia had the most with 15 counties and West Virgina and Wyoming also each had one. That gave us 12 states and one district.

Florida, Georgia, Rhode Island, Utah and Washington all had some counties raised but none up to $625,500. They were raised to 115% of the counties median home prices. The rest of the states, 31, were all left at $417,000 as the conforming limit for single family residences.

None of this adds up to a positive change. The problem is they lowered the ratio from the stimulus ratio of 150% to the aforementioned 115% of the median county home price without comment. The second problem is counties are too large and have too many dissimilar areas. The Coachella Valley, Riverside County, which stretches from Palm Springs to La Quinta and beyond, and it one of the largest recreation and second home areas in the State of California. It has a much higher median home price but still is painted with Riverside County's brush, which is one of the hardest hit counties in the state. I am sure there are areas in every state that have much higher property values than the county they are in. Scotsdale in Arizona comes to mind, Lake Tahoe in Nevada, Shaker Heights in Ohio, Greenwich, Conn. etc. There is a reason for my concern.

Jumbo loans, those higher than conforming, are harder to find because fewer lenders offer them. They are harder to qualify for as a borrower and have generally higher rates. Why should someone in Palm Springs, California have to get a jumbo loan to purchase a home of $600,000 with 20% down, while they can buy the same home in a community in Los Angeles or Orange County, about 60 miles away, with 5% down and at a much lower rate? Will this not lead to uneven growth patterns in some states, and definitely between some states? Why discriminate? The idea of the higher loan limits is to facilitate more houses, not less.

The FHA has not set their new limits for 2009 and beyond. They, I hope will use better reasoning than Fannie and Freddie, although they are part of the same ownership, the U.S.A. Why does it seem that whenever the government gets into a business environment that their solutions appear lacking in clarity and common sense? I am sure their answer would be "not enough need for higher limits in those areas", isn't that it tantamount to saying no flu vaccine in certain areas because not enough people need the vaccine. We are trying to find a solution to the real estate and mortgage crisis and holding back loan limits in approx. 60% of the states doesn't seem to be a solution. It appears to be more of a punishment.

It is too soon to find out the short term results of the stimulus loan plan, creating conforming jumbo loans up to $729,750 in about the same areas we have now raised conforming loans to the new limit, $625,500. It will take a year or so or even longer. Why then did we get rid of these loans which obviously helped and replace them with loans $100,000+ less? In summing up my thesis we had two sets of loans available from Fannie Mae and Freddie Mac: conforming up to $417,000 and conforming jumbos up to $729.750 maximum but definitely higher in many areas than the conforming limit. That is readily seen by the aforementioned cut in the percentage over the median price home in the county. These loans are now history. Now we have 19 states and one district with loan limits higher than $417,00, of which 14 states are at the maximum $625,500, and 31 states who are at $417,000 and looking for jumbo loans that start at $417,001. You know my conclusion, what's yours?