Government Says Your House Needs A Band-Aid

June 10th, 2011


In 2008 Congress decided the mortgage world and the economy in general were imploding. And one of the hundreds of ways they decided that they knew better than anyone else and that they would help (i.e. interfere), was to raise the maximum conforming loan limit that Fannie Mae and Freddie Mac offered for loans.

A new class of loan

They created a class of loan called “conforming-jumbo”, also known as “conforming high balance.” It used to be that conforming loans would go up to $417,000, as of 2008 with this new class of loan you could now borrow up to $729,750 and still get a conforming interest rate, that was only slightly higher than the conforming interest rates for loans below $417,000. Hooray. I’m sure the taxpayer did not mind being on the hook for more losses.

The geniuses in our government figured if they extended the conforming loan limit through which Fannie Mae and Freddie Mac offered loans, that this would spur on the housing market. Of course the housing market continued to decline, except for in a few strong markets, like Washington DC for example.

It was only going to be temporary

This creation was supposed to be temporary in 2008, and only last for a year. But the “temporary” conforming loan limit extension in high-cost areas was extended into 2009. And it was extended into 2010. And it was extended to into 2011. Now the geniuses in Congress have decided to extend this gimmick even more. But now they claim they will no longer continue to roll it over, the new rules are:

For loans that go to settlement on or before September 30, 2011, the “temporary” high-cost area loan limits will apply and will be the same as the 2010 high-cost area loan limits, up to a maximum of $729,750 for a single family home. Loans that go to settlement on or after October 1, 2011, will use the “permanent” high-cost area loan limits. The formula used to determine this is 115% of the 2010 median home price, up to a maximum of $625,500 for a single family home.

So let me make sure I have this straight.

With Fannie Mae and Freddie Mac being influenced by or run by the geniuses in Congress over the last several decades, these two entities have racked up losses approaching $125 billion (to date, who knows what lies around the corner). And this was mostly for loan limits up to $417,000. For the past three years we have raised those low limits by almost 75% to $729,750. And now the answer to help reform the insanity is to drop the loan limit from $729,750 to $625,500, which is about a 14% drop. A 75% raise…then a 14% drop. I will say it again. 75% raise…14% drop.

All of the geniuses that we have populating Congress and their fancy law degrees must know something that I do not. I never knew that subsidies and giveaways help fix a marketplace, but I guess that is why I am a lowly loan officer in the mortgage industry. If I was smarter I would be a Senator or congressperson. I like the sound of it, “Senator Martucci.” I can see this happening. I like the idea. “Senator Martucci, do you take your abuse of power with milk or sugar?”

We’ll see how long this “permanent” loan limit lasts. My money is on this changing again and again and again, depending on the whim of politicians. Look out below…

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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