In response to a tightening of credit in the jumbo-loan market, lawmakers are calling on Congress to let Fannie Mae and Freddie Mac purchase substantially larger loans on homes in high-cost metro areas. Currently, Fannie and Freddie can purchase single-family homes for up to $417,000 in the continental U.S. In May, the House passed a bill that would let Fannie and Freddie purchase and securitize bigger mortgages in high-cost areas within the continental U.S. In areas where the median price exceeds to $417,000 cap, the current proposal would permit Fannie and Freddie to purchase loans up to that region's median price or $625,000, whichever is lower. Now Reps. Barney Frank, D-Mass, and Gary Miller, R-Diamond Bar, have called on the Senate to raise the conforming loan limits even higher. "It now is clear that we underestimated in the House bill how far we should raise the conforming loan limit, and the current crises in the mortgage market demonstrate we should raise it to a higher level," said Frank, chairman of the House Financial Services Committee and sponsor of the House bill, HR1427. However, neither Frank nor Miller would say exactly how much higher they would like the limit raised. In the past few weeks, several large lenders have cut back or ceased making loans that can't be sold to Fannie and Freddie, primarily because investor demand for these jumbo-mortgages has dried up. Investors are still willing to buy securities from Fannie and Freddie because these securities come with guarantees that investors will get cash flows - principal and interest - from the mortgages in their pool. The decrease in investor demand for jumbo mortgages has pushed up the rates relative to conforming loans. At this point, the difference in rates on jumbos as compared to conforming loans is almost three-quarters of a percentage point, about three time as wide as normal.It is still not clear whether Congress will agree to the increase in the limits. The California Association of Realtors and others have been lobbying Congress for at least 4 years to raise the loan limits in high-cost areas. Last year, the House passed a similar bill to the one now before Congress, but it never got far in the Senate. The Mortgage Bankers Association (MBA) has declined to endorse higher loan limits. One reason is that some of the MBA's large members make and securitize jumbo loans and don't like the idea of two giants such as Fannie and Freddie entering into their market. Another concern is that investors might get cold feet if Fannie and Freddie started putting jumbo loans into conforming-loan securities. The MBA believes a faster way to add liquidity to the mortgage market would be to let Fannie and Freddie keep more mortgages in their portfolios. Both companies are still operating under the portfolio caps imposed after accounting deficiencies were uncovered. The agency that regulates the companies has said that it is still unwilling to lift these caps for the time being. However, if the mortgage crises does not ease up soon, the MBA says it might reconsider its neutral stance on higher loan limits.
Should congress raise the conforming loan limits to ease the crunch?
Jumbo definition: "The term jumbo mortgage loan refers to any loan that is higher that the maximum dollar amount established in Fannie Mae and Freddie Mac's guidelines. At this time, any loan for a single family property greater than $417,000 is considered a jumbo loan. The limits increase to $533,850 for two-unit properties, $645,300 for triplexes and $801,950 for 4-unit homes. There are also some areas of the Country where the limits are higher including Alaska and Hawaii."
