Breaking with the Bush administration’s position, California Gov. Arnold Schwarzenegger has added his voice to the chorus clamoring for an increase in the $417,000 conforming loan limit, the ceiling for mortgages eligible for purchase or guarantee by Fannie Mae and Freddie Mac.
In a letter to congressional leaders, Schwarzenegger urged the passage of legislation raising the conforming loan limit to $625,000 in high-cost housing markets, allowing the government-chartered mortgage finance companies to play a greater role in California by expanding into what’s now considered the jumbo loan market.
The secondary market for so-called jumbo loans that exceed the conforming loan limit was disrupted last August, by fears of rising mortgage defaults and falling home prices. Those fears — which began with rising defaults on subprime loans made to borrowers with blemished credit but spread to alt-A and even some prime loans — have made jumbo loans harder to obtain since last summer, and more expensive for those who still qualify.
Conforming loans — those eligible for purchase or guarantee by government-chartered Fannie and Freddie — have remained widely available, and at rates that are falling. That’s prompted industry groups such as the National Association of Realtors to call for an increase in the conforming loan limit, so that Fannie and Freddie can provide liquidity for jumbo loans (see Inman News story).
Although the Bush administration has expressed reservations about taking such a step, California’s Republican governor is breaking with the party line.
“In a state where the average price of a home far exceeds that loan limit, Californians find themselves priced out of the very help these loans are intended to provide,” Schwarzenegger said in a letter to House and Senate leaders.
Last month, the California Association of Realtors reported that the median existing-home price in the state had fallen 11.9 percent in one year, to $488,640. At the end of November, median home prices remained far above the conforming loan limit in markets like the San Francisco Bay Area ($793,930), Santa Clara ($855,000) and Orange County ($661,580).
Leslie Appleton-Young, chief economist for CAR, said decreases in the statewide median prices seen in recent months were the result of difficulties in obtaining jumbo loans.
In his letter, Schwarzenegger claimed more than 50 percent of California home buyers lack access to loans that have the backing of the government-sponsored enterprises, or GSEs.
“When combined with the withdrawal of the jumbo loan market, it’s no surprise that current home sales activity in California is half the pace seen in 2006,” he said.
A recent analysis by the Office of Federal Housing Enterprise Oversight (OFHEO), which supervises the GSEs, concluded that while raising the conforming loan limit might lower interest rates on jumbo loans, it could also detract from Fannie and Freddie’s core mission of providing financing for affordable housing.
Allowing Fannie and Freddie to venture into the jumbo loan market would entail greater risk and would consume funds the GSEs could use to buy up a greater number of smaller loans, OFHEO warned. OFHEO has proposed lowering the conforming loan limit in 2009 in concert with falling home prices.
But Schwarzenegger maintains that moderate- and low-income families in high-cost housing markets are “hit hardest” by the conforming loan limit, because it restricts their access to lower-cost, lower-down-payment, fixed-rate loans.
“Lifting the GSE loan limit in these areas would help put affordable home purchase and refinancing options within their reach,” the governor said, noting that Federal Housing Administration and Department of Veterans Affairs loan guarantee programs also have limits tied to the conforming loan limit.
Some who oppose an increase to the conforming loan limit argue that much of the home-price appreciation seen in some markets during the boom was artificial. Speculators pushed home prices out of reach of average families, and prices should be allowed to return to more affordable levels, critics say.
The Bush administration maintains that before it will go along with an increase in the conforming loan limit, Congress must pass legislation overhauling oversight of Fannie and Freddie, which were rocked by management and accounting scandals that forced them to restate several years of earnings.
The House of Representatives passed legislation in May, HR 1427, that would create an independent agency with powers similar to those of a bank regulator to oversee Fannie and Freddie.
HR 1427 would authorize the GSEs to guarantee and securitize loans of up to $625,000 in high-cost housing markets, but not purchase such loans to hold in their portfolios.
A companion bill to HR 1427 has yet to be introduced in the Senate, and attempts to reform oversight of the GSEs have floundered in Congress for several years because of disagreements over limits on growth in their loan portfolios, which today total nearly $1.5 trillion.
New York Democrat Sen. Charles Schumer introduced a bill in September, S 2036, that does not address oversight of Fannie and Freddie, but would provide a temporary, one-year increase in the conforming loan limit.
The National Association of Home Builders (NAHB) and Housing Policy Council (HPC) of The Financial Services Roundtable last week said the groups support a temporary increase in the conforming loan limit in high-cost areas, “as part of prompt action on GSE reform legislation.”
The groups called on the Senate to approve legislation similar to HR 1427, reforming oversight of Fannie and Freddie and mandating a two-year increase in the conforming loan limits. As envisioned by NAHB, the increase would be rescinded after two years if the jumbo market returns to normal.
Although Schwarzenegger’s letter to congressional leaders did not address such details, a spokeswoman for the governor said he advocates a permanent increase in the conforming loan limit independent of HR 1427 or other GSE reform legislation.
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