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How Stimulating Will Raising the Conforming Loan Limit Be?

Eric Trailer, Mortgage Banker, Absolute Mortgage Banking

February 21st, 2008 · 9 Comments

All hail our legislative and executive branches for passing into law the latest shot of adrenaline to our economy: the 2008 stimulus package. And it looks like a record was set with how fast the bill became law– wow, pretty impressive… Efforts like providing consumers with tax refund checks and businesses with additional write-offs should certainly inject the economy with billions of dollars, but many have asked me how raising the conforming loan limit, especially in CA, will truly stimulate the economy. Further, many of those have asked me whether it’s really the right thing to do.

Let’s start with whether it’s the right thing to do. Probably one of the better arguments against raising the conforming loan limit is the fact that doing so seems to reward those institutions and individuals that/who put us into this mess. If estimates by the National Association of Realtors is correct, 500,000 refinance transactions will be generated, 300,000 additional homes will be purchased and 210,000 foreclosures will be avoided. So if we conservatively estimate the revenue generated and the losses avoided using industry standards, the total is over 40 billion dollars! $40 billion certainly helps answer the question of how such an effort helps the economy; but again, why help those who caused billions of dollars of losses and a turned the market upside down? Shouldn’t we be punishing those bad, bad people and institutions? Well, the truth is that many of those institutions and individuals have gone away or moved on. So let’s take a moment to see what’s being created here.

Raising the conforming loan limit has the following benefits:

  1. It does in fact greatly stimulate the economy
  2. Many consumers who got in over their head will now be able to afford their mortgage
  3. Greater affordability for housing is created
  4. It will influence a portion of the jumbo market that has been lost and create some investor confidence, and finally
  5. California has been long overdue to have a raise to the conforming limit given that over 50% of the nation’s jumbo mortgages were originated in California.

Okay, let’s say that raising the conforming loan limit is good for a moment. What’s next and what are the details? There’s still some speculation, but here goes:

  1. The conforming loan amount will be determined based on 125% of the median price of a given county…
  2. This allowance will NOT go into effect for purchase or refinance transactions until July 1, 2008 (that’s the earliest date that the loan application may be signed) since the market needs from now to June 30, 2008 to liquidate current qualifying mortgages available for sale from institutions
  3. The types of programs allowed will be fixed-rate programs on a full-doc basis, which means that the hybrid, interest-only programs using “stated” income will not be allowed
  4. The property must be single-family and owner occupied, which means that 2nd homes, investment properties and multi-unit properties are ineligible
  5. Credit scores must be “reasonable” with a combined loan-to-value not to exceed 90%
  6. No cash-out, which means that a refinance may not allow the borrower to receive any greater than $2,000 at closing
  7. Loans must be funded and closed prior to December 31, 2008

The last question really has to do with what pricing of conforming loans will look like come July 1, 2008. My prediction is that, all things being equal today, that conforming loan rates will increase and that jumbo loan rates will decrease, leaving a much smaller margin between conforming and jumbo loans in the future. Since all things won’t be equal due to decreased short-term rates by the Fed and the overall stimulus package helping the economy, conforming loan rates will increase greater than jumbo loan rates will decrease. So, if you’re buying closer to the conforming level today, you’re better off getting a mortgage for the long term; if you’re at the jumbo level today, you’re likely better off going more for a short-term solution. Of course always consult closely with your mortgage, tax and legal professional for the best advice as it relates to your individual situation.

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9 responses so far ↓

  • 1 How Stimulating Will Raising the Conforming Loan Limit Be? | The Long List of Odysseus Medal Nominees | Realtors and real estate, mortgages, lending, investments // Feb 21, 2008 at 2:36 pm

    [...] How Stimulating Will Raising the Conforming Loan Limit Be?, by Eric Trailer. [...]

  • 2 Chris Iverson, Realtor // Feb 22, 2008 at 9:55 am

    Wow, clarity from a mortgage lender? Amazing stuff!

    Thanks for the update - I’m getting A LOT of questions on this lately.

  • 3 Still confused about Conforming Loan Limits? « theFrontSteps…step inside san francisco real estate // Feb 22, 2008 at 10:47 am

    [...] confused about Conforming Loan Limits? 22 02 2008 3 Oceans Real Estate provides some answers: Raising the conforming loan limit has the following [...]

  • 4 kelly // Feb 22, 2008 at 3:48 pm

    When did the decision get made to hold back applications until 7/1/08? where is that information?

  • 5 Sunday Real Estate Wrap-Up | Real Estate Investing for Real Blog // Feb 24, 2008 at 12:34 pm

    [...] How Stimulating Will Raising the Conforming Loan Limit Be? - The 3 Oceans Real Estate blog takes a thorough look at how raising the conforming loan limit will truly stimulate the economy, and whether it’s really the right thing to do. Share This Popularity: 1% [?] • Did you like this article? If so, subscribe to our blog [...]

  • 6 Eric Trailer // Feb 26, 2008 at 9:45 am

    Hi Kelly,
    As mentioned, there is still some speculation regarding the “official” word, but my inside sources stated what I had written. Between now and June 30, the institutions are given an opportunity to sell what’s on their books that qualify under the new parameters, which helps to make this new market available, as well as provide visibility into investor confidence level.

  • 7 dudley doright // Feb 27, 2008 at 6:23 pm

    Uh, that’s a really fascinating story from your “inside sources” about why the new limits won’t take effect until July 1, but it says right in the language of the bill that the new limits are RETROACTIVE TO JULY 1, 2007.

    That’s right, last July.

    The reason — so that Fannie and Freddie can buy up loans banks are still holding on their books — was explained very clearly on this very blog .


  • 8 Eric Trailer // Feb 29, 2008 at 2:09 pm

    Thanks for the note, Mr. Doright. For clarification, I was referring to a consumer’s ability to leverage the new limits for a new purchase or refinance transaction. As stated, it’s still speculation. But I do appreciate you reading the article.

  • 9 Eliot Spitzer and Making Sense of the New Conforming Loan Limits | 3 Oceans Real Estate, A Boutique Real Estate Brokerage Serving the San Francisco Bay Area // Mar 18, 2008 at 11:07 am

    [...] of California, you have good reason to feel excited, encouraged and confident!  Why?  If you read my last post last month, you know that the conforming loan limits for many California Counties are going up and that means [...]

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