Stimulus Plan Includes Conforming Loan Limit Increase?

| January 24, 2008

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I know that the president and the congress have been hard at work trying to perform some kind of economic defibrillation to make sure the US does not slide into recession. At present it looks like Uncle Sam is going to be handing out packages of “free money” to everyone in the country except rich people. What passes for rich may vary.

While we are still waiting for official word of what is and is not in there, this little nugget of doom surfaces (from Market Watch):

Mortgage industry cheers stimulus proposal

CHICAGO (MarketWatch) — Rates on jumbo loans got a lot more expensive after last summer’s credit crunch, and the mortgage and real-estate industries have been calling for an increase to the conforming loan limit as a way to help more borrowers obtain favorable mortgage rates.

On Thursday, they had reason to believe their wish would be granted when a proposed economic stimulus plan included a new conforming loan cap.

According to the proposal, the temporary limit for loans that can be bought by Fannie Mae and Freddie Mac, government-sponsored mortgage agencies, would be $729,750, or 125% of the median house price in the area.

The current conforming loan limit is $417,000; loans larger than that are considered jumbo and aren’t eligible to be financed through government-sponsored enterprises. This summer, when the private, secondary mortgage market no longer had an appetite to invest in these loans due to questions about risk, jumbo loans got much more expensive for borrowers.

Under the proposal, limits for Federal Housing Administration loans would also increase to the temporary level; the current FHA loan limit is $362,790.

So for those of you wondering why anyone would care. Houses in places like California usually cost more than the $417,000 “conforming” loan limit. This means people buying houses in California usually have to find alternative financing, and pay a steeper price to finance their homes.

One of the reasons that house prices got so high here is that people could get crazy financing for huge amounts without adequate resources to pay it back. So “dumb money” bid the price too high, and now no one can buy or sell because they can’t finance their homes.

So there are two ways to fix this – the healthy way would be to let the market forces bring the prices down to what people can reasonably pay. This is the best for everyone long term as it levels out who can live in California.

The second way would be to use the government backed entities, Fannie and Freddie, to prop up these insane prices. This is akin to providing an alcoholic with discount coupons for the corner liquor store. Not the best way to clean up.

A very bad idea all around that is going to perpetuate the problems that California faces.

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Category: Credit Backlash, Economics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

Comments (3)

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  1. loscielos says:

    The latest experiment in Seattle is that when alcoholics start costing the state too much money, they get a free apartment with a nurse where they can drink in their own room. The justification is that it’s cheaper for the state than cleaning them off the street every night.

  2. loscielos says:

    Here’s another “Nugget of Doom” quote that’s been around for a while:

    “If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their Property until their Children will wake up homeless on the continent their Fathers conquered.” -Thomas Jefferson

  3. Bruce Henderson says:

    Well, it seems that Jefferson, Washington, Franklin and Lincoln are not taught quite as well in school as they should be. Maybe we are reaping the harvest of lack-luster education standards.