WASHINGTON—Since March 2008, the housing market has depended on government-backed loans with a maximum limit of up to $729,750 in high-cost areas. But all that is about to end with Congress resigned to allowing the maximum limit to drop back to $625,500 on Oct. 1.
A handful of senators and congressmen are still pushing for an extension. However, their chances of succeeding are slim, according to industry lobbyists, analysts and other players in the market.
The Obama administration signaled earlier this year that it would support a reduction in the loan limit that governs Fannie Mae, Freddie Mac and the Federal Housing Administration.
Most Republicans are anxious to reduce the GSEs' role in the mortgage market and expand the size of the jumbo players, especially several new conduits that have been eyeing the business for well over a year. Many jumbo lenders, including conduit officials, say they are anxious to compete in this new market, noting that $30 billion in potential product might come their way.
Sen. Dianne Feinstein, D-Calif., was expected to offer a loan limit extension amendment last week during a markup of the Housing and Urban Development appropriations bill, but then realized her amendment would not pass and withdrew it. California is home to some of the highest housing prices in the nation outside of the Northeast.
The California senator warned that the reduction in the loan limit to $625,500 will lead to more defaults and foreclosures on the West and East Coasts and “have an impact on the entire economy.”
Sen. Richard Shelby, R-Ala., opposed the amendment. “I hope we would let these loan limits revert back to where they belong,” said Shelby, the ranking Republican on the Banking Committee.
Still, another appropriations committee member—Senate Banking Committee chairman Tim Johnson, D-S.D.—pledged to work with Feinstein on the loan limit.
He noted there is “broad agreement” that government's role in the mortgage market needs to be reduced in the future. “It is not clear that today is the right time,” Johnson added. “Our housing market is still fragile.”
The National Association of Realtors supported the Feinstein amendment and is one of the few trade groups still actively lobbying for a loan limit extension.
According to NAR, the reduction in the loan limit to $625,500 will impact 75 high-cost counties in 13 states.
However, the loan limit formula in non-high-cost areas is currently set at 125% of area median home prices. It will decline to 115% of area median home prices on Oct. 1 unless Congress acts quickly. This adjustment to 115% will reduce loan limits in nearly 600 counties in 42 states.
“It is not strictly a Northeast and California problem,” said Glen Corso, managing director of the Community Mortgage Banking Project. “And people apparently don't realize that.”
Meanwhile, the impact of those reduced loan limits will fall mostly on FHA borrowers in non-high-cost areas. The floor or minimum loan limit on Fannie and Freddie loans is $417,000, but only $217,050 for FHA loans.
“We think the county-by-county impact on FHA homebuyers is going to be particularly acute,” Corso said.
NAR estimates loan limits would fall by an average of $30,000 in 100 Midwestern counties with 200 counties in the South experiencing an average loan limit reduction of $47,000.
The Community Mortgage Banking Project favors a temporary continuation of the high-cost limits. “Now is not the time to be dampening or subtracting demand from the housing market,” Corso said.
