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Raising conforming loan limits won't make much difference
How much will the housing market be helped if Washington authorizes Fannie Mae, Freddie Mac, and the Federal Housing Administration to buy more expensive mortgages? Not as much as you might guess. The changes are part of an economic stimulus package passed by Congress and sent to President Bush for his signature on Feb. 7. A study released Feb. 7 by Deutsche Bank analyst Nishu Sood looks at the loan provisions and sums it up with this headline: "High-profile policy, low-profile impact." Sood concludes: "Every little bit helps, but we expect only a few percent of home transactions to be impacted in 2008." Here's why: --Loan limits will go up only in metro areas with high home prices such as Washington, D.C., and California. That's 20 of 160 metro areas in the U.S. --The market is going to charge a premium for mortgages that are close to the higher limits, albeit not as big a premium as the one on today's jumbo mortgages. --The benefit of higher loan limits is offset by the greater difficulty of qualifying for loans. --The bulk of the spring selling season could pass before higher loan limit benefits flow through to consumers. (Actually it's worse than Sood says: the final bill says the conforming loan limit wouldn't go up until July 31.) --The higher loan limits are set to expire at the end of 2008. --Although the changes in FHA limits will affect a greater number of metro areas (about half of them), the interest-rate benefit is smaller on FHA loans than on loans that conform with Fannie and Freddie's limits. Washington, D.C., is the one top-10 market for builders where Sood thinks raising the conforming loan limit will make a significant difference. By the way, the congressional plan is to change the conforming loan limit from $417,000 to 125% of the median home price in each market or $417,000, whichever is greater. The FHA loan limit, which tends to be substantially lower, would also rise to 125% of the median home price. (Image courtesy of Miller Samuel's Soapbox.)