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Non-Conforming Practices in Lending

by Chicago Agent

Many thought the drop in federal loan limits last fall would adversely affect housing, but that doesn't seem to be the case.

The federal conforming loan limit was one of the most highly contentious issues in the tail end of 2011, but based on recent statistics, all that controversy seems to have been for naught.

Originally passed in late 2008 to counter the stricter lending standards that private banks enacted after the financial crisis, the loan limits were raised from $625,500 to $729,750 for all Fannie Mae, Freddie Mac and Federal Housing Administration (FHA) loans. Those higher limits expired, though, on Oct. 1 of 2011, and many housing analysts and industry advocates claimed the decrease would greatly reduce the availability of mortgages to prospective homebuyers, given that nearly 90 percent of new mortgages still sport a federal guarantee.

But now that the dust has settled and analysts have had reasonable time to study the market fallout, there seems to be none of the doomsday scenarios that some had predicted, said Henry Santos, a senior executive at Accenture Credit Services, in a HousingWire story on the jumbo mortgage markets.

“Step No. 1 was to lower the limit,” Santos said. “I think the market is still waiting to see if Step 2 is creating a different guarantee or some other option for jumbos. There’s a lot of dialogue that the Feds aren’t done with yet — maybe there’s going to be another solution. Operationally and working with our clients, I have not seen what I would call a trend at this juncture.

Plus, many local markets were unfazed by the decrease, and only a specific might have been temporarily affected. Kevin Lanham, a loan officer and FHA specialist at Chicago-based Pacor Mortgage Corp, said he knew from the start that the loan limit drama would have no impact on Chicago’s markets.

“It may be cliche but real estate is and always has been local,” he said via e-mail. “Since the Chicagoland area loan limits weren’t affected by the legislation, I knew that it wouldn’t have an effect locally. I know it gained a lot of traction as a talking point on a national level, but in reality, only the areas of the country that had benefited from the temporary raise in lending limits would be adversely effected by the change that came about last year.”

Additional data from Inside Mortgage Finance supports that conclusion. In 2011, 88 percent of new mortgages and home-equity loans carried a government guarantee, but debt from jumbo loans of $417,000 or more – the types of mortgages that were supposed to be affected by the loan limit drop – made up just 8.7 percent of that total, and the share rose only 0.6 basis percentage points last quarter as the limits fell.

Despite those facts, though, the National Association of Home Builders (NAHB) is still ardent in its support for a higher loan limit.

“We’re not arguing that the limit should stay at the higher level for all time,” said David Ledford, the NAHB’s senior vice president of regulatory affairs, in HousingWire’s piece. “We were just saying that the change was made at a time when the market had not yet recovered and it still hasn’t and is very fragile. We’re arguing let’s let the market stabilize before we start making a lot of changes that make it more difficult for people to purchase.”

But even the current loan limit scenario still reflects lobbying efforts of organizations like the NAHB. As soon as news broke that the Obama White House was letting the higher limits expire – arguing that lending responsibilities should ultimately return to the private sector – there were substantial lobbying efforts from the National Association of Realtors (NAR) and the NAHB, which inspired a late hour vote on Oct. 20 when the Senate reinstated the higher limits by a 60-38 margin.

The House of Representatives still needed to vote on the raise, though, and ultimately concessions were made to reconcile the Senate bill, which had raised limits for all GSEs, and the House bill, which had difficulty garnering bipartisan support. In the final bill, only FHA loans were raised to the $729,750 mark, while loans from Freddie and Fannie remained at the lower level.

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