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Conforming loan limits: The only way to expand is to reduce

Aside from delays and the threat of higher mortgage rates caused by the shutdown, another matter of mortgage interest has surfaced recently: discussions about possible changes in the size of loans Fannie Mae and Freddie Mac are allowed to purchase.

Reducing conforming loan limits

There have been rumblings that the Federal Housing Finance Agency would like to reduce these loan limits, obviously in hopes of starting to reduce Fannie and Freddie’s exposure and influence in the market.

However, there has been some pushback from the mortgage and real estate industry, and last week, 66 members of the House of Representatives signed a letter calling for the FHFA to reconsider the move, openly questioning the authority of Fannie and Freddie’s regulator to make such a change.

The private market needs to grow

Lowering the loan limits is an interesting argument, to be certain.

On one hand, regulators and industry participants alike have generally agreed that getting more private capital into the mortgage market is desirable.

If the size of the premium quality mortgage market is, say, $1 trillion, and Fannie and Freddie are garnering 75 percent of that, this only leaves 25 percent as a truly private mortgage market.

If the government does not reduce its share of the market, how will it be possible for private markets to grow in this confined space?

The only way to expand is to reduce

Certainly, we could grow the $1 trillion overall, but to expand the pie means easing credit standards to attract and serve more potential borrowers. Given the fallout from the last episode of lending to folks with lesser credit strength, it is generally agreed that this is a bad idea (at least at the moment; this will no doubt change over time).

If we are to try to get private money back into the market, and if private money will presently only serve “A” quality applicants, and the market is of finite size (and government is getting the lion’s share of it), the only way to expand private involvement is to reduce that of the public, and it must come from the top down.

Jumbos have come alive

You may recall arguments that the market for certain borrowers would collapse when the “agency jumbo” limits were trimmed back from a maximum of $729,750 to $625,500 (and a number of areas were dropped from any form of expanded limits at all). Industry participants argued, and correctly so, that there were plenty of banks willing to jump into that fray and serve those highly desirable borrowers.

In the period since, the secondary market for jumbo mortgages has come alive, and lenders are becoming more willing to lend in these markets and can do so again profitably.

A change must happen

It is an interesting debate to observe, though. At some point, a change must happen if we are to have less taxpayer money at risk. In the meantime, we push forward as we have.

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