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Update1: Congress Approves Jumbo Conforming Limit, Still Unnecessary

UPDATE1: Congress approved keeping the jumbo conforming loan limit at $729,750 through 2010. We still think it was unnecessary.

The “resolution” is headed for the president’s desk where he is expected to sign it either today or tomorrow.

Despite our opinion that the combination of falling home prices and the narrow market which can take advantage of the higher loan amount made the extension unnecessary, the National Association of Realtors maintains their stance:

“NAR commends both houses of Congress for their quick action in continuing these higher limits during a time for recovery in the housing market and national economy. The higher limits, along with the home buyer tax credit extension, are necessary to keep the markets moving at this critical time,” said NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth.

Jumbo borrowers can continue to get a Fannie Mae and Freddie Mac-backed loan of up to $729,750 (in some markets) throughout 2010.

Original post published on 10/28/09: There are proposals in both the House and Senate to keep the conforming jumbo loan limit at $729,750 until the end of 2010:

“While those [jumbo] loan limits aren’t scheduled to go down to $625,500 until January 1, if not maintained at the higher level now, the mortgage industry will begin to plan for loans at the lower amount,” according to a joint press release by the chairs of the appropriations committees in both houses of Congress, Sen. Daniel Inouye (D-HI) and Rep. David Obey (D-WI).

Inouye and Obey added: “This could result in major disruptions in the mortgage origination market for large loan sizes as early as November.”

However, we argue that, based on the fundamentals, the extension isn’t necessary. The formula used to determine the jumbo conforming loan limits from year to year is 1.15 times the median home price of a localized area. The home price index from the previous year is used to dictate the loan limits for the following year. Using this formula, and knowing that home prices have been on a continued decline this year, there may be no practical reason to extend the loan limit.

For those of you who are unfamiliar, conforming loans (whether standard or jumbo) are those guaranteed by Fannie Mae and Freddie Mac, and have a lower interest rate than would the private market’s version of a similar product thanks to Fannie and Freddie’s low borrowing costs and the Fed’s mortgage-backed securities purchase program.

Leaving out home prices for a minute, does the narrow slice of borrowers who take advantage of the conforming jumbo product really need a subsidized mortgage rate? Jumbo borrowers tend to be highly-qualified, and, quite frankly, more well-off than other borrowers. Leaving the loan limit at $729,750 keeps these highly-qualified borrowers out of the private market, where high-quality loans contribute both to solvency and profitability. Holding the limit at an artificially-high level means lenders must compete for business against the government — almost always a losing proposition.

Senator Inouye and Representative Obey’s point that “[Lowering the limit] could result in major disruptions in the mortgage origination market for large loan sizes as early as November,” is perhaps valid, but in our opinion, a bit overstated. There may be some disruptions as borrowers must transition to a private market environment, but we don’t foresee it to be “major.”

One unanswered question remains: “how many borrowers have taken these loans this year?”

Based on falling home prices and the fact that the audience who takes advantage of this product is likely quite small, we can’t find any concrete, fundamental reason to keep the jumbo conforming loan limit from falling back to $625,500.

For a history of the conforming loan limits, click here.