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October 6th, 2010

Fannie, Freddie loan limits extended for one year. Why?

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Late last week President Obama signed a one-year extension to keep Fannie Mae and Freddie Mac’s loan limits at $729,750. H.R. 3081 not only kept the higher loan limits in place, but it also allocated an extra $20 billion to the FHA’s General and Special Risk Insurance Fund (that money is designed to keep the FHA lending at least through the end of the year, explains Housing Wire).

About two weeks ago we wrote a post titled “Here’s Washington’s chance to step aside.” After both Treasury Secretary Timothy Geithner and HUD Secretary Shaun Donovan expressed the need for the government to play a smaller role in the housing market, we thought that lowering Fannie and Freddie’s loan limits could be Washington’s first step in returning some of the market control over to the private sector. That didn’t happen.

There seems to be two very different opinions on the overall importance of the higher loan limits:

Robert Story Jr., chairman of the Mortgage Bankers Association, said extending the existing limits is essential to the functionality of the housing industry.

“The current limits have been a key component of keeping the mortgage market functioning, helping keep mortgage interest rates low for consumers who want to purchase a home or refinance an existing mortgage,” Story said after Congress passed the bill Thursday.

We’re of a different opinion.

There are a few reasons why we don’t think the higher loan limits are as important as Story explains. As we wrote earlier, this just seemed like the perfect opportunity to test the interest of the private market without creating too much of a disturbance:

Given the fact that the private market has already shown several signs of interest in jumbo loans, and given the fact that the size of the jumbo marketplace that the three agencies guarantee is relatively small, only about 2-3 percent of the entire mortgage market would be adversely affected by the lower limits. That being the case, why wouldn’t the private market be able to absorb the loans that the three agencies could no longer guarantee?

With the higher limits in place for another year, we don’t see another way that Washington can begin to move away from the housing and mortgage markets without creating too much of a stir.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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