Good News for California if the Proposed Change to the Conforming Loan Limit Passes

Fannie Mae (FNMA) and Freddie Mac (FHLMC) create a
loan limit for loans that they will purchase. It is currently
at $417,000 for a single-family home. This limit is reviewed
annually and is primarily determined by whether prices of
homes have gone up or down during the year.

In light of the disruption in the mortgage market, lawmakers
are looking for ways to stimulate activity and provide
liquidity for lenders.

The proposal is to increase the conforming loan limit to
$625,000 on a single-family home in California. Those of
us in the mortgage profession have often wondered why
Hawaii and Alaska were classified as "high-cost" with
higher conforming loan limits, and California was not.

This may finally be a recognition that California borrowers
need the kind of support that the other high-cost areas
have provided.

If this goes through, there are at least a couple of
significant benefits to homeowners and new home
purchasers.

For those who have an existing loan that is between
$417,000 and $625,000, there may be an opportunity to
refinance their loans. Because their loan originally was
created as a "jumbo" loan (above the $417,000 conforming
limit), they probably paid a higher rate in that market.

With rates dropping and their loan balance now fitting within
the favorable conforming loan limits, a lower interest rate
may be available for these borrowers. Or, it may present
an opportunity for borrowers to disengage from a loan
that had a low initial rate and that would be scheduled for
a recasting of the interest rate and, most likely, higher
payments.

Another reason that it may benefit new home purchasers
is because it would now create liquidity in the mortgage
market that had evaporated over the last seven months or so.

Investors that had purchased mortgage-backed securities (MBS)
that were comprised of jumbo loans had seen a drop off in the
timely payments and performance of those investments. As
a result, they elected to make investments in other vehicles,
since they no longer had confidence that the quality of these
MBS was as high as they were led to believe.

When investors won't purchase loans, lenders are limited as to
how much money they have to lend. This generates a slowdown
and a logjam with lenders now having to keep loans in their own
lending portfolio instead of moving them through a fluid system.

If FNMA and FHLMC increase their loan limits, there now would
be a mortgage conduit that is more broadly accepted because
there is an element of government backing to these two corpor-
ations. This would revitalize the mortgage market, and by
extension the housing market. It would create the ability for
lower-valued homes to be marketed and allow those homeowners
to move up. This would benefit the entire real estate market.

Let's hope that Congress will be able to get this proposal through,
do it quickly and have an immediate effective date. The stimulus
that this would provide can help offset the effects of the "mortgage
crisis" that has affected the economy to such a large degree.