Open Letter: GSE Lending Limits Must Be Temporarily Raised Nationwide
Dear members of the United States House of Representatives,
You are currently considering legislation that would raise the lending limits in designated "high cost areas" of the U.S. for loans guaranteed by Fannie Mae, Freddie Mac and FHA back to levels originally established on a temporary basis in 2008. For the reasons discussed below, I encourage you to go beyond this minimal restoration of higher lending limits, and temporarily raise the lending limits not just in "high cost areas," but nationwide.
As you are aware, our nation is in the midst of the worst housing crisis in its history. Over the past four years our nation's housing has lost an estimated 33% of its value; exceeding the 31% of value lost during the Great Depression. The impact of this reality cannot be overstated. With the vast majority of Americans' net worth made up of home equity, the loss in home values has had a devastating effect on consumer confidence, spending and financial stability. Coupled with the highest unemployment rate in a generation, there is no doubt that this is a crisis that requires a smart yet aggressive response from policymakers.
One way for Congress to put our housing sector and our economy on the road to recovery is to raise the GSE lending limits nationwide to $729,750. The reasons for this are as follows.
First, an estimated 17% of all mortgage loans in the U.S. fall between the conforming loan limit of $417,000 and the $729,750 temporary limit for "high cost areas" that recently expired. Despite this, estimates from HUD suggest that only 3% of all loans closed in 2010 were in this range and from these "high cost areas." This clearly suggests many of the loans in this range are found outside of the designated "high cost areas" in the U.S.
Second, there are few alternatives for borrowers nationwide needing a loan in this intermediate balance range. According to Inside Mortgage Finance, private jumbo loan originations fell to $87 billion in 2010 from a record of $650 billion in 2003. The lack of clear housing policies, including the future of Fannie and Freddie, the role of Federal government backing for some mortgage loans and the rules for the functioning of the secondary market are all reasons for the lack of private sector alternatives at this time.
Third, the lack of a single, higher lending limit across the country puts home values at greater risk, thereby increasing the risk to the GSEs and taxpayers.
Throughout the history of Fannie and Freddie there has been a uniform conforming loan limit that applied throughout the contiguous 48 states. It was not until the passage of the Housing and Economic Recovery Act of 2008 that differing loan limits were established for certain geographic areas designated as "high cost." Prior to this legislation, the uniform nationwide loan limit was based on the national median home price.
The argument for change was based on the fact that there is a wide differential in median home prices in local markets around the country. As a result, certain citizens have been able to benefit from these higher loan limits solely because of where they live, while others are precluded from taking advantage of lower rates because of where they live.
I believe all homeowners having loans in this balance range should have an equal opportunity to benefit from current low rates. The result of temporarily raising the lending limits everywhere would be financially stronger citizens and financially more stable communities—not to mention more stable GSE loan portfolios.
Fourth, the reduction of jumbo lending is coming at a huge cost to the economy. The National Association of Realtors estimates that the economic impact of a single home sale is just under $70,000. As recently as 2007, the NAR estimate for jumbo loan economic impact nationwide was $78 billion. Two years later their estimate had dropped by $42 billion due to the slowdown in sales and the inability to finance these properties. A potential $42 billion stimulus with no cost to taxpayers is exactly the type of action needed.
Fifth, while the temporary increase of GSE lending limits to $729,750 nationwide would technically increase the GSE's retained risk, the net risk to the GSEs after the supportive aspects of the change are taken into account would be significantly diminished. Utilizing the sensible and responsible underwriting guidelines already in place for high balance conforming loans, adding risk fees, and restricting the lending limit increase to a six-month period would be methods of limiting risk even further.
To summarize, it is just not in the "high cost areas" where increased GSE loan limits can have a great impact. Communities in every state would also benefit from the temporary creation of a viable lending solution for marginally higher-priced homes.
Why shouldn't a borrower in Alabama with a loan in this size range not be given the same opportunity to purchase or refinance as his fellow citizens in high cost states such as New York or California?
We all want a stronger, less risky home sector that offers predictable benefits for homeowners, investors and taxpayers alike. However, we must be willing to take aggressive action in the short run, based on fundamental economic principles, if we are to achieve our shared goals in the long run.
The private sector will step up to fill this void, but not until the bigger questions related to housing finance are dealt with. In the meantime, the lack of financing for this market segment could further destabilize an already fragile housing market.
I urge you to temporarily raise the GSE lending limits nationwide to $729,750 without delay and not just for "high cost areas."
John Walsh is the president of Total Mortgage Services, Milford, CT