A Terrible Conforming Loan Idea

Last week Senators Robert Menendez (D-NJ) and Johnny Isakson (R-GA) introduced a bill that would extend the conforming loan limits, which are set to fall from their historically high levels at the end of September. This legislation is similar to a bill co-sponsored by Rep. John Campbell (R-CA) and Rep. Gary Ackerman (D-NY). Right now the GSEs can purchase and/or securitizes loans as much as $729,750 in some areas. That high cap will be reduced to $625,500.

Consider that for a moment on its face. The federal government feels the need to make sure mortgages as high as $600,000 to $700,000 get financed and put the taxpayer at risk through Fannie Mae and Freddie Mac. Ridiculous.

What is even more preposterous is that Sens. Menedez and Isakson feel the need to keep the conforming loan limit even from $625,500. This decline will barely impact homeowners as it is. There are about 130 million homes and the NAHB says there are about 1.4 million homes valued between $625,500 and $729,750. Even if all of these homes had mortgages purchased by the GSEs or were refinanced into mortgages purchased by the GSEs, that would still only comprise 1% of the market. And even that is unlikely.

What should really happen is a faster reduction in conforming loan limits to get rid of the GSEs all together. This should be combined with increases in g-fees and FHA reforms to gradually, over five years, shift all affordable housing activities to FHA with strict underwriting standards and subsidies subject to appropriations and sunset Fannie and Freddie’s charters.

For more on this see my Congressional testimony earlier this year.