My New Blog

The President and Congress seem prepared to act to infuse the US economy with much needed liquidity.

First up, rebates. Yay. I’m spending mine, are you? In fact, I’ve already spent mine. Have you?

Second up, raising conforming loan limits.

You’ve probably already heard about this, and/or read about it, elsewhere. I have, but honestly, my eyes kind of glaze over after seeing the headline.

But, because my readers come first, here’s a brief outline of how I see things.

Congress seems eager to raise the conforming loan limit from its current $417,000 to a higher amount. (Which is somewhat an about-face, since earlier last year, the two government-sponsored organizations, Fannie Mae & Freddie Mac, were being pressured to lower the limit, due to dropping home prices across the nation.)

The new amount may be a flat amount, nationwide, or it may be set by local market, based on the average price of homes sold.

This would, of course, be beneficial to many in the Greater-Boston area.

If you get a loan for less than the limit, $417,000, you pay a lower interest rate on your loan. This is because the big guys, Fannie Mae & Freddie Mac, will guarantee the value of your loan. Your lender can then sell your loan on the financial markets, meaning your lender can then make another loan, etc., etc., etc. It’s good for the general economy (well, unless those loans go belly-up, but what are the chances of that happening. Ha, ha. Ha?)

If you can’t get a “conforming” loan, then you pay a higher rate.

Lately, “jumbo” loans have had a much higher interest rate, due to the added risk.

So, most people think it’s a good idea to raise the rate.

I guess. I’m ambivalent. I don’t know. Something just doesn’t seem right to me.

Here’s the way I see it:

Pros:

* Increases access to funds for more people - is this totally accurate? I guess it will, because lenders will be able to sell more loans on the secondary market, so they’ll have more money to lend. Plus, separately, Congress will probably push to increase Freddie Mac’s and Fannie Mae’s loan portfolio limit, which is something like $10 billion (trillion?) $1.5 trillion. So, loan limits will be higher, dollars available will be higher, we’ll all be able to borrow more. This is awesome!

* Lowers the cost of borrowing for many people - true. The spread between a fixed-rate mortgage and an adjustable-rate mortgage is at least 1 full percentage point - 5.43% vs. 6.48%, last I checked. That’s $2,817 vs $3,137 on a $500,000 loan. $320 savings, each month.

Cons:

* The last thing we need is more borrowing beyond people’s means. Is this the (unintended) effect of all this?

* Will raising conforming loan limits cause home prices to increase? Perhaps my thinking is convoluted (meaning, wrong) but if you make the cost of borrowing less, then people can borrow more, if their incomes are constant, right? All that extra liquidity would make prices rise. (Well, this isn’t all bad, right? If people can spend more on housing and home prices rise, more people will sell, right? Wait, do I see a vicious cycle at work?)

* Fannie Mae & Freddie Mac were created in order to help those on the lower-end of the market get access to funds, to find a way for them to become homeowners. If we raise conforming rates, then those who are “middle-class” (and above) will take out loans. This is bad because 1) it’s not what the organizations were set up to do; 2) these organizations are the epitome of “big government”; and, 3) Fannie Mae & Freddie Mac only have access to a limited amount of funds - if lenders have to offer money to more borrowers but without any more cash available, it’s not really going to help anyone; plus, if a lender has the choice between making two loans at $250,000 or one at $500,000, won’t it go with the higher-priced, for obvious reasons?

Meanwhile, Presidential candidate US Senator Christopher Dodd proposed a bill to help thousands of homeowners hold onto their homes.

Senate Banking Committee Chairman Christopher Dodd floated a plan to establish a government body to buy troubled mortgages from banks and investors and move homeowners into loans insured by the federal government or bought by Fannie Mae and Freddie Mac …

… Sen. Dodd said his proposal would direct as much as $20 billion toward a new agency that would buy distressed loans at “steep discounts” to help borrowers escape expensive subprime loans. The agency would make 30-year fixed-rate loans, Sen. Dodd said at a news conference. He said the proposal isn’t meant to be a bailout for bankers, investors or homeowners.

It sure sounds like a bailout. And I think that most people dread the idea of the US government becoming holders of mortgage loans, especially those of borrowers who have already had trouble paying their bills.

Source: Plan for a Mortgage Buyer Gains Some Ground - By Damian Paletta, The Wall Street Journal