I’m republishing this item to fix an error that was pointed out to me by Alison Fitzgerald of Bloomberg. (Thanks, Alison.) My error was to say that the increase in loan limits wouldn’t take effect until July 31. It’s actually retroactive to July 1, 2007. That means that banks will be able to sell lots of existing jumbo loans that are clogging up their books to securitizers, giving them the capacity to make new loans. It’s an important difference, although I think the overall point of this item still stands.
How much will the housing market be helped if Washington authorizes Fannie Mae, Freddie Mac, and the Federal Housing Administration to buy more expensive mortgages? Not as much as you might guess. The changes are part of an economic stimulus package passed by Congress and sent to President Bush for his signature on Feb. 7.
A study released Feb. 7 by Deutsche Bank analyst Nishu Sood looks at the loan provisions and sums it up with this headline: “High-profile policy, low-profile impact.” Sood concludes: “Every little bit helps, but we expect only a few percent of home transactions to be impacted in 2008.”
—Loan limits will go up only in metro areas with high home prices such as Washington, D.C., and California. That’s 20 of 160 metro areas in the U.S.
—The market is going to charge a premium for mortgages that are close to the higher limits, albeit not as big a premium as the one on today’s jumbo mortgages.
—The benefit of higher loan limits is offset by the greater difficulty of qualifying for loans.
—The higher loan limits are set to expire at the end of 2008.
—Although the changes in FHA limits will affect a greater number of metro areas (about half of them), the interest-rate benefit is smaller on FHA loans than on loans that conform with Fannie and Freddie’s limits.
Washington, D.C., is the one top-10 market for builders where Sood thinks raising the conforming loan limit will make a significant difference.
By the way, the congressional plan is to change the conforming loan limit from $417,000 to 125% of the median home price in each market or $417,000, whichever is greater. The FHA loan limit, which tends to be substantially lower, would also rise to 125% of the median home price.
(Image courtesy of Miller Samuel’s Soapbox.)
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.