The Housing Chronicles Blog: The perils of raising conforming loan limits in declining markets

Thursday, February 14, 2008

The perils of raising conforming loan limits in declining markets

The Inman News blog has an interesting post today regarding raising conforming loan limits for areas in which housing prices are declining, since the temporary maximum loan limits are based on median housing values. Consequently, the hoped-for maximums announced in the stimulus plan signed by President Bush on Wednesday may end up being smaller than anticipated:

All 19 metropolitan statistical areas (MSAs) identified as places that might see an increase in the conforming loan limit are declining markets. In just one quarter, four of these markets saw median sales prices decline more than 10 percent.

This creates at least two potential issues. One, the estimated new limits in yesterday's table probably overestimate what the new conforming loan limit might be in these markets -- in some cases, by quite a bit.

In the case of L.A.-Long Beach-Santa Ana, where prices fell 13.4 percent from quarter-to-quarter, the new loan limit would be almost $100,000 less than projected using the older numbers ($637,125, rather than the $729,750 cap).

Riverside would barely sees an increase, to $422,500. Sacramento now looks like it won't see an increase at all, based on the new fourth quarter numbers.

The dramatic price declines in many of these markets raises another, potentially more troubling issue: will Fannie Mae and Freddie Mac have to require larger down payments, or raise their rates and fees considerably to offset the risk of purchasing or guaranteeing these "jumbo light" mortgages? It may be that if they don't, secondary market investors won't want to buy securities backed by these loans, because of the risk that borrowers will end up upside down.

Fannie and Freddie have already increased surcharges for borrowers with credit scores below 680 and are now requiring down payments of at least 5 percent on loans in declining markets (see Inman News story).

If raising the conforming loan limit doesn't do much to reduce borrowing costs in these markets, the benefits for housing markets may be less dramatic than some have hoped.

Estimated conforming loan limit increases (revised)

Metropolitan statistical area Median price Q3 '07 Median price Q4 '07 One quarter change Estimated new limit
Anaheim-Santa Ana, Calif. $700,700 $657,400 -6.2 percent $729,750
L.A.-Long Beach-Santa Ana, Calif. $588,400 $509,700 -13.4 percent $637,125
San Diego-Carlsbad-San Marcos, Calif. $589,300 $522,900 -11.3 percent $653,625
San Francisco-Oakland-Fremont, Calif. $825,400 $777,300 -5.8 percent $729,750
San Jose-Sunnyvale-Santa Clara, Calif. $852,500 $845,300 -0.8 percent $729,750
Riverside-San Bernardino-Ontario, Calif. $376,900 $338,000 -10.3 percent $422,500
Sacramento-Arden-Arcade-Roseville, Calif. $335,700 $297,600 -11.3 percent $417,000
Barnstable Town, Mass. $400,600 $382,300 -4.6 percent $477,875
Boston-Cambridge-Quincy, Mass. $414,600 $380,700 -8.2 percent $475,875
Boulder, Colo. $375,800 $371,100 -1.2 percent $463,875
Bridgeport-Stamford-Norwalk, Conn. $490,200 $460,200 -6.1 percent $575,250
Miami-Fort Lauderdale-Miami Beach, Fla. $346,300 $345,900 -0.1 percent $432,375
New York-Northern N.J.-Long Island, N.Y./N.J. $476,100 $457,400 -3.9 percent $571,750
New York-Wayne-White Plains, N.Y. $550,900 $523,300 -5.0 percent $654,125
Edison, N.J. $391,800 $370,300 -5.5 percent $462,875
Nassau-Suffolk, N.Y. $470,000 $461,700 -1.7 percent $577,125
Newark-Union, N.J./Penn. $459,700 $435,800 -5.2 percent $544,750
Seattle-Tacoma-Bellevue, Wash. $394,700 $377,500 -4.4 percent $471,875
Wash. D.C.-Arlington-Alexandria, Va./Md./W.V. $437,600 $400,100 -8.6 percent $500,125

Source: National Association of Realtors, Inman News analysis

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