Economists' Outlook

Housing stats and analysis from NAR's research experts.

It’s No Time to Reduce Conforming Loan Limits

After blowout budget deficits, it is understandable that some people want to reduce the role of government.  However, now is not the time to reduce the limit on government-backed mortgages, which is a decision set to take place at the end of this month.  A recovery in housing is the key to broader economic recovery.  A home price recovery is the key to small business job creation, because housing equity has been an important source of funds in starting small businesses.  Small business start-ups, not surprisingly, have been exceptionally low in the past three years just as housing equity was getting crunched.  Home prices have returned to fundamentally justifiable levels, if they have not overcorrected, in just about every local market.

Undue obstacles to the housing recovery should not be put in place just as there are signs that the housing market is starting to stabilize – exemplified by several consecutive months of national home price gains and modest home sale increases.  Yet the lowering of the loan limit is an obstacle to recovery.

Jumbo mortgages carry higher interest rates than government-backed conforming mortgages.  According to today’s reading at bankrate.com, the 30-year fixed conforming mortgage rate is offered on average at 4.1%, while the jumbo non-conforming loans carry 4.8%.  The jumbo rate should be only a tad higher under normal market conditions; that is, they should be at 4.3%.  Aside from today’s reality, that these loans are only accessible to the super high-credit individuals while many consumers are unable to tap into these rock-bottom rates, the conforming rate itself appears overpriced, possibly due to tacit collusion among banks.  Typically the spread between 30-year mortgage rate and the 10-year Treasury should be about 180 basis points (1.8% points) at most.  So with the 10-year Treasury today at 1.8%, the 30-year fixed rate should be about 3.6% (and not the 4.1% it is currently).  Higher rates deter people from buying a home.  Those jumbo loan borrowers, who are still deciding to enter the market, are merely forking over higher monthly payments to a banking industry that is not competitive.  Simply put, jumbo borrowers are getting cleaned out by an uncompetitive, oligopolistic industry that is very susceptible to tacit collusion.  These large banks are ‘too-big-to-fail’ and ‘too-big-to-profit’.  Contrary to the banking industry’s belief, they are taxpayer-backed.  Think about the TARP money the industry received during the banking crisis!

Until more competition is introduced to the banking industry, consumers will be paying higher than normal banking-related fees and interest rates.  Some have said that the Dodd-Frank legislation, though written with good intentions, has led to survival of only the biggest banks and non-competitive market performance.  Others have said the many frivolous fuzzy lawsuits against banks are hampering them from lending.  Without getting into these complex arguments, one thing is clear: mortgage rates are unnecessarily high, and they will get higher still once the loan limits are lowered.  So unless there is an extension to keep the current loan limit for another year or two, more than 669 counties in 42 states and territories would be negatively impacted with an average decline in loan limits of $68,000.  Fannie and Freddie made terrible and arrogant mistakes in the past in thinking they were for-profit companies with backing from taxpayers.  Now that both are effectively on the mission to assure liquidity flow with responsibility to taxpayers, both Fannie and Freddie have been making good ‘internal profits’ for the taxpayers on loans made from 2009 and on.  Lowering the loan limit now is a terrible idea for both American consumers and for economic recovery, and Washington policymakers do not seem to get it.

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